Tag: ci futures

The Week Ahead – 15 Aug 2022: Europe drought: Cost, energy & industry impact

Post author By admin
Post date August 13, 2022

Learn more about CI Futures here: http://completeintel.com/2022Promo

In this episode, we talked about the European drought — and looked at the cost, energy impacts, and industry impacts. We also talked about coal and discussed more broadly energy. But more specifically coal, and what will be some of the issues around it. How will the coal issues impact refineries and other downstream activities? Finally, we looked at inflation. It’s been covered to death last week — CPI PPI — but we also put a few words in on it.

Key themes
1. Europe drought: Cost, energy & industry impact
2. Coal & energy
3. Inflation
4. What’s ahead for next week?

—————————————————————-

This is the 30th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:

Tony: https://twitter.com/TonyNashNerd
Albert: https://twitter.com/amlivemon/
Tracy: https://twitter.com/chigrl

Listen to this episode on Spotify:

Time Stamps

0:00 Start
0:49 Key themes for this Week Ahead
2:16 Europe drought: containers on the Rhine
4:22 How hot is Europe compared to other places?
5:25 How is France doing?
6:02 Europe’s embargo of Russian coal – will it make things worse?
7:48 The beneficiaries of Europe’s Russian coal embargo
9:32 Where’s most of the coal coming from?
10:00 Rhine River and how it affects coal and crude transport
13:00 Is there a silver lining in what’s happening in Europe?
14:16 How will the happenings in Europe impact politics in the region?
15:36 How you should be playing European equities?
16:40 Have we hit the peak inflation?
20:22 Will there be a Feb pivot?
21:17 What’s for the week ahead? Listen to the podcast version on

Transcript

Hi everyone. Thanks for joining us for The Week Ahead. I’m Tony Nash with Complete Intelligence. We’re joined by Albert Marko and Tracy Shuchart as usual. And Sam is out this week and he’s fishing, so I hope he sends us some when he’s back. Some good fish pictures, though. Great pictures from Maine or Vermont or wherever he is. So it’s just beautiful up there.

So this week we’ve got a couple of things on top. First, we’re talking about the European drought. We’re looking at the cost, we’re looking at the energy impacts, industry impacts. Then we’re looking at coal more broadly, energy, but specifically coal, and what will some of the coal issues, how will that impact refinery and other downstream activities?

Finally, we’re looking at inflation. It’s been covered to death this week, CPI PPI, but we’re going to kind of put a few words in on it and then we’ll look at the week ahead.

So before we get started, please like this video, please subscribe to this video. Please give us your comments. We always do come in. We always do respond to comments, even if they’re negative.

And also we have our $50 a month promo for CI Futures, which is our subscription platform for everything that’s traded in, everything economics, top 50 countries. So currencies, commodities, equity indices, $50 a month. You can do it a month at a time. You can do it a year at a time. Check it out.

We do forecast a twelve-month horizon. You can see our error rates, you can see correlations and everything for every single asset that’s on there. So this is a limited-time offer. I think it’s only for another two weeks. Limited time offer, please check it out. Please subscribe. Biggest thing you have at risk is $50 and you can cancel.

Subscribe to CI Futures at $50 per month for a limited time only!

All right, so thanks very much for that. Guys, let’s dive into this for Europe. I want to look at there have been a couple of things out, stories out today about containers on the Rhine not being able to get. There’s a tweet from Bloomberg Energy that we’re showing where container companies can’t get containers up the Rhine and obviously the heat and the drought and there are a number of issues for Europe and Germany specifically.

So Albert, can you kind of go into that? And we’re going to switch to the water levels on the Rhine as well so you can see the red line is well below year to date for water levels on the Rhine.

So Albert, can you kind of help us understand what’s going on there and what the impacts are going to be?

AM: Yeah, I’ll circle back to Germany, but there are other countries that are having similar problems at the moment. You have the Italian. Italy’s pool river completely dried up. Unbelievable. The UK suffering the same effects. Heat waves are hitting France. And this is really bad timing, especially when it comes to inflation, because the commodities and energy prices are skyrocketing.

Now, they have problems for the irrigation of the crops. They have transportation down certain riverways. So the costs are just set to inflate even further from this point on.

Germany, being pretty much the economic engine of Europe right now, is just absolutely taking it on the chin month after month. And this is certainly something that they don’t really need to be happening at the moment.

The Rhine River, like you’re saying, has big effects for multiple industries, specifically energy. They just can’t get things up and down the river at the moment. And the stuff that they can get down the river, the shipping costs have gone. I don’t even know what the rate is the last time I saw this, two or three times the normal rate.

So at this point, it’s like the Europeans, they need a winter where they have a lot of snow or a lot of rain. Otherwise, they’re facing a financial crisis coming.

TN: So let me ask you this. This is going to sound pretty ignorant, but I live in Texas. It’s really hot. Florida, it’s kind of warm, a little bit beautiful. Great place to move if you’re from California. But it’s easy for us to say, “gosh, we deal with heat all the time, it’s not a big deal.” But Europe is a lot hotter than it usually is, right? So how much hotter? Celsius or?

AM: I wouldn’t say that. Maybe the timing of the heat waves is really bad with the droughts. That’s the problem. Because it’s not exponentially hotter than it was previous summers, but it’s just the timing of it is really bad and there’s been no rainfall. Europe has always had a problem with fresh water supply, and that’s why the United States has been blessed that we have ample fresh water.

Forget about the lake meat stuff that you hear right now. I’m talking about in the farm, the Midwest, where all the farms and all the industry is ample fresh water. And Europe doesn’t have that and they are suffering for it right now.

TN: Now, the key crop… So we’ve talked about energy before and you’ve said France, they’ve kind of got their act together and they don’t have to worry like Germany or in Italy does. How is France doing compared to the other places? I’m sure they’re suffering, but are they a little bit better put together?

AM: They are a little bit better put together. They have ample food supply that sustains their nation. I think they sold 40% of the wheat crop to China, which I think is probably going to hurt them later on in the year as the job persists. But for France right now, they’re actually sitting far better than Germany is.

TN: Okay, great. So let’s dig down a little bit more on energy. Tracy, you mentioned before we got on that Europe just embargoed Russian coal, right? With all of the issues and the industry issues in Germany, how much worse does that embargo make things? Before we get into coal prices and all that stuff. How much worse does that make things, the embargo on Russian coal?

TS: Well, it’s just another example of self harm, right. Because we’re already seeing… Russia is already prepared for this. We’ve already seen them sell oil to China, and India makes up for those barrels that are not making it to the west. Right.

And so they’ve already been doing that with coal. Russia has actually become India’s third largest supplier within the last couple of months. And to avoid Western sanctions, they’re also paying in yuan and the Hong Kong dollar. And that’s not to say that the US dollar, they’re trading dollars for those currencies to avoid Western sanctions. So it’s not that they’re not using dollars anymore, but it is that they figured out a clever way to get around sanctions.

TN: Just circumconvention, right?

TS: Right. I think that just like oil, where everybody expected three to 4 million barrels to be taken off the market immediately, we never saw this come to fruition because it was such heavily discounted. Those barrels found our way to market anyway, and so is Russian coal, to be honest. So really this hurts Germany more than anything.

That said, the flip side of that is that the beneficiaries of that policy are going to be Australia, United States, Colombia and South Africa.

TN: Okay. So if we look at Australia, just to kind of focus in on there, China barred Australian coal about two years ago, a year and a half ago, something like that? So is there ample supply in Australia to support Europe? And is that new? Have they already been redirecting things to Europe?

TS: I mean, they’ve already been redirecting things everywhere else because demand has suddenly gone up. Right. And not globally. So what we’re seeing, if we look at the benchmark Australian price, which is Newcastle Coal, their prices are about 400 AUD, which is about $284.

If we look at what current spot prices are going for in the United States, particularly on the East Coast where shipping is a lot less, we can see that those are significantly lower. So that does bode well for coal companies on the East Coast with access to ports, closer access to ports, rather than coming, say, from the Midwest or the West Coast.

TN: So we’ve got the weekly coal price commodity spot prices for us up right now. So the highest there is 186 for Illinois Basin coal. Right. So where is most of that coal coming from? Is it Appalachia? Is it Joe Manchin territory?

TS: You’re going to want to look at Appalachia. Okay. They’re closest to the East Coast, which means your shipping costs significantly go down because you don’t have to ship it across the country first. Clean coal. Yes.

TN: So that does bode well for the United States, just because it’s significantly lower. But I kind of wanted to go back and in the same vein, if we go back to the Rhine River. The fact is that because water levels are so low, they’re about 1.5 meters deep right now. That will sit around 1.2 meters deep. It sits in about 30cm leave room. At the lowest levels right now, where there’s nobody traveling, obviously, they’re about 42cm. Actually, the lowest was in the lowest in the last century was in 2018, where they were about 25cm.

But what’s happening is because, what’s happening with the energy industry in general, because we’re talking there’s a lot of oil products sent down that river as well as coal, is that what these vessels are having to do is they’re having the third with what they’re normally carrying.

TN: So. If you had a vessel that went down and you’re paying X amount of dollars, now you have three vessels going down because you have to split that into a third because those water levels are so low. There’s more demand, there’s higher shipping costs, lower capacity. So those shipping costs are times, what, five or something per unit per ton.

TS: Or are absolutely ridiculous. And then when we talk about like low river levels, they typically impact regional, downstream, refined products. Right. Rather than upstream. So this is going to have a major impact, particularly in Switzerland and Germany again. So this is going to increase the cost of their refined product, particularly diesel, which there’s already a diesel shortage. So I expect that situation to get ten times worse as well as coal and other commodities that are sent out the river.

TN: Okay, so just to shift a little bit downstream. So if you talk about refined products and then we go a step further to say, plastics and that sort of thing. And we look at say, the electronics industry in Germany. We look at automotive industry in Germany. So do we expect a major impact on those industries as well? And at what pace will that happen? Will that be three months? Will that be nine months?

TS: Oh, absolutely. I think that’s going to have a major impact, especially because we’re already looking at those industries, looking to a lot of the manufacturing industry in particular are looking to go from gas to oil switching or gas to diesel switching.

So if diesel becomes a problem, right. And oil becomes a problem coming down the river, that’s going to make that situation entirely worse. So we’re looking at this situation, I would say three to six months, much sooner than later for certain, especially as we head into the winter.

TN: Oh yeah. So it sounds to me we know that Europe has inflation problems. Right. We know that Europe has energy problems with the river issues and the drought issues. They now have crop problems and they have supply chain problems and they have, say, secondary impacts of, say, refining secondary, tertiary impacts of refining issues. Right?

So I’m not asking this to be funny, like is there good news out of Europe? Or is there a bright spot in Europe right now?

AM: No, there really isn’t. There really isn’t. Everything coming out of Europe right now is negative. The ECB came out today and said they’re not going to raise any more rates until next year and they’re looking at a secondary inflation event, causing bigger problems for the European Union and the UK. I don’t want to leave the UK out of it because they got drought issues and transportation inflation issues to deal with all, but there’s no silver lining for the next six to twelve months, in my opinion.

I think the euro is actually going to go down to 95 subparity for quite a while.

TN: This year?

AM: At the end of the year and into next year. Okay, so let me ask a couple of questions about markets and politics in Europe. First of all, how will this environment impact European politics in the near term? I expect the German coalition to break apart probably sooner than later. These inflationary effects are going to cause big problems. I mean, just the energy costs alone in Germany, God help them if they see frozen Germans dying, elderly people dying over the winter. It’s just a political nuclear bomb over there.

TN: Okay. Italy, places like that, obviously?

AM: Italy is a disaster. Italy has always been a disaster. It’s just like their government’s rise and fall with the wind.

TN: UK, same? Do you think we’ll have a very short term government form and then it will fall away next year or something like that?

AM: Yeah, I believe one year. One year will last about a year. The French government is a little more stable, but even then McCrone lost the majority there. But Europe right now is in turmoil. The Dutch. Same problems with the Dutch. All these coalitions that have slim majorities are just going to start breaking apart. Okay, so ECB has kind of lost its backbone. European politics is in disarray. The Euro is likely to devalue or depreciate to 95.

TN: How are you playing, in a broad sense, equities in Europe? Do you think it’s a real danger zone for the next six months? Or again, are there broad equities?

AM: When, there’s blood in the water you want to start buying. I would look at what’s systemically important to the European Union, like Deutsche Bank, French Bank Societe Generale, BASF.

These systemically important components to the economy have to be shored up so they’ll get bailouts

of support or whatnot and stimulus packages. That’s where. I’d be buying probably in January, February.

TS: I think we’re already seeing a ton of bailouts, particularly in utilities right now. And so obviously those are going to help those stock prices. And so I expect we just hit the tip of the iceberg with Unifer. Right. And there’s a lot more to come. Those are the sectors that I would be watching.

TN: Wow, that’s pretty bad news. Okay.

AM: It’s almost to the point where European equities will be cheaper than Chinese equities. That’s what we’re getting to.

TN: Okay, that’s good to know. We’ll keep an eye out for that. Okay, let’s move on to inflation. So everyone’s covered CPI and PPI this week. Please don’t turn off the show right now. We’re going to say something, but I did a survey yesterday. Very scientific, very statistically valid, Twitter survey yesterday looking at in light of CPI and PPI, where do we think Fed rates will go? And it’s pretty much a tie between 75 and 50. So I wonder, guys, we heard for days. There was zero month-on-month inflation, right? CPI inflation. And we saw negative. PPI. These are the things that you look at when there’s hyperinflation. We can’t find good news in the year on year. So let’s look at incremental data. So do you think we’ve hit peak inflation in the US?

AM: No. Secondary effect of inflation coming, mainly because the Fed started to rally this market for political optics. Commodities are rising. I mean, they’ve tried so hard to keep oil and wheat down, and it just simply will not break certain levels. It just won’t go down. Stay in 80s for the oil. It won’t break 750, 770 in wheat. And they just can’t do it. They have to go after these things, but they can’t during the election season.

TN: Okay, so you bring a good point with crude oil. There has been a lot of attention and work to keep crude oil prices and gasoline prices down. Tracy, how long can that happen? Because really, a lot of the zero or negative is in energy, right?

TS: Exactly. And I think what we’re seeing a lot here especially if you look at the front line, is I think we have a lot of things going on right now with the fact that as much Russian crude oil wasn’t taken off the market that people initially thought. There were recession fears. The SPR garage are really starting to weigh on that front month. So there’s a lot of things going on here that are kind of weighing on that front month. Plus open interest is nothing. And we also have China is still on their zero COVID policy and hasn’t opened up yet. So there’s a lot of things weighing on that the market right now. That said is that as soon as the SPR stops, which is end of October, coincidentally near in the Midterms.

Once that stopped and I still think Xi is going to have to open up China somewhat near the People’s Party Congress. And so I think that looking into the end of 2022 and into 2023, we definitely could see those higher oil prices again regardless of what the Fed does.

TN: Okay. Now, compound that real quick, compound those oil prices rising with the cost of rent going up astronomically and I don’t know what magic they’re going to be able to pull to keep CPI under 10%. What month? Like October, November, December?

AM: October, November. December. Okay. Smack in the middle of the Midterms. And they got to be seeing this. They have to be seeing it. If they’re not seeing it right now, it’s purely because the White House is interfering and wants politically driven news for the markets right now.

TN: Okay, so do you think like a slight pivot to 50 basis points in September is possible or likely and then that eases up, helps markets out, goose’s markets going into the Midterms and then we start to see this inflation rush come on and say late October, November?

AM: Well, first of all, we have to see what Powell says at Jackson Hole. Whether he’s dovish or hawkish. This rally makes me think that he’s going to have to be hawkish. Right. And then we’re still looking at probably a 50 basis point rate hike in September and after that I don’t want to even project what happens after that because it really depends on what CPI is going to be printing.

TS: Agree with that.

TN: Okay, perfect guys. So you’re talking about markets rallying. Let’s talk about the week ahead. Equities have done pretty good this week, right? And commodities have done pretty well this week as well. So what are we looking for next week? You say volume is thin. Okay. So do we have another thin

volume week next week? Markets get goose, people feel good and then they come back the following week and we see some drama? What are you expecting?

AM: Yeah, I think that they could take this up closer to 4320 in the S&P. I think that’s the 200-day moving average, if I’m not mistaken. So they could take it up to there. But I’ll tell you what, looking at some of the order books on the S&P on the Futures, there is a boatload of sellers from 4260 to 4300. That boatload of them.

TS: Yeah. It’s summer, right? Theres… Next week is the same as this week. You’re not going to see much until we hit September and fund managers and everybody’s back from their holidays. So I think we’ll see much of the same. The thing is that retail keeps trying to short this, which is kind of just a fuel to push this market higher because of liquidity issues. I think next week will be kind of the same. I’m not looking for outside of any disastrous thing happening, which hope not. But I think we’re going to stay in this well probably throughout the rest of August.

TN: And one of the things that I want to start thinking about, this isn’t the week ahead, but this is kind of the months ahead. I wonder if what happens if Russia Ukraine gets settled in October, November? That changes calculations pretty dramatically. So I’m starting to work on that hypothesis as well.

AM: Yeah, it depends on what a settlement is and whether Western sanctions still continue to bite the Russians, which are obviously going to retaliate economically. So a lot of the definitions need to be dealt with there.

News Articles

How AI-based ”nowcasts“ try to parse economic uncertainty

Post author By admin
Post date August 11, 2022

This post was published originally at https://www.emergingtechbrew.com/stories/2022/06/17/how-ai-based-nowcasts-try-to-parse-economic-uncertainty?mid=13749b266cb1046ac6120382996750aa

This month, the S&P 500 officially hit bear-market territory—meaning a fall of 20+ percent from recent highs—and investors everywhere are looking for some way to predict how long the pain could last.

Machine learning startups specializing in “nowcasting” attempt to do just that, by analyzing up-to-the-minute data on everything from shipping costs to the prices of different cuts of beef. In times of economic volatility, investors and executives have often turned to market forecasts, and ML models can offer a way to absorb more information than ever into these analyses.

One example: Complete Intelligence is a ML startup based outside Houston, Texas, that specializes in nowcasting for clients in finance, healthcare, natural resources, and more. We spoke with its founder and CEO, Tony Nash, to get a read on how its ML works and how the startup had to adjust its algorithms due to market uncertainty.

This interview has been edited for length and clarity.

Can you put the idea of nowcasting in your own words—how it’s different from forecasting and the nature of what you do at Complete Intelligence?

So Complete Intelligence is a globally integrated machine learning platform for market finance and planning automation. In short, we’re a machine learning platform for time series data. And nowcasting is using data up to the immediate time period to get a quick snapshot on what the near-term future holds. You can do a nowcast weekly, daily, hourly, or minutely, and the purpose is really just to understand what’s happening in markets or in a company or whatever your outlook is right now

And what sort of data do you use to fuel these predictions?

We use largely publicly available datasets. And we’re using billions of data items in our platform to understand how the world works…Macroeconomic data is probably the least reliable data that we use, so we use it for maybe a directional look, at best, at what’s happening. Currencies data is probably the most accurate data that we use, because currencies trade in such narrow bands. We use commodities data, from widely traded ones like oil and gold, to more obscure ones like molybdenum and some industrial metals. We’re also looking at individual equities and equity industries, and we track things like shipping times for goods—shipping times…are usually pretty good indicators of price rises.

Who are your clients, and how are the nowcasts used in practice?

Our clients range from investors and portfolio managers, to healthcare firms and manufacturing firms, to mining and natural resources firms. So they want to understand what the environment looks like for their, say, investment or even procurement—for example, how the current inflation environment affects the procurement of some part of their supply chain.

In fact, we’re talking to a healthcare company right now, and they want to nowcast over the weekend for some of their key materials. In an investment environment, of course, people would want to understand how, say, expectations and other variables impact the outlook for the near-term future, like, days or a week. People are also using us for continuous budgeting—so revenue, budgeting, expenses, CFOs, and heads of financial planning are using us…to understand the 12- to 18-month outlook of their business, [so they don’t have to have an annual budgeting cycle].

Tell me about how the AI works—which kinds of models you’re using, whether you’re using deep learning, etc.

There are basically three phases to our AI. During the pre-process phase, we collect data and look for anomalies, understand data gaps and how data behaves, classify data, and those sorts of things.

Then we go into a forecasting phase, where we use what’s called an ensemble approach: multiple algorithmic approaches to understand the future scenarios for whatever we’re forecasting. Some of those algorithms are longer-term and fundamentals-based, some of them are shorter-term and technical-based, and some of them are medium-term. And we’re testing every forecast item on every algorithm individually and in a common combinatorial sense. For example, we may forecast an asset like gold using three or four different forecast approaches this month, and then using two forecast approaches next month, depending on how the environment changes

And then we have a post-process that really looks at what we’ve forecasted: Does it look weird? Are there obvious errors in it—for example, negative numbers or that sort of thing? We then circle back if there are issues…We’re retesting and re-weighting the methodologies and algorithms with every forecast that we do.

We’ve had very unique market conditions over the past two years. Since AI is trained on data from the past, how have these conditions affected the technology?

You know, there’s a lag. I would say that in 2020, we lagged the market changes by about six weeks. It took that amount of time for our platform to catch up with the magnitude of change that had happened in the markets. Now, back then, we were not iterating our forecasts more than twice a month. Since then, we’ve started to reiterate our forecasting much more frequently, so that the learning aspect of machine learning can really take place. But we’ve also added daily interval forecasts, so it’s a much higher frequency of forecasting and in smaller intervals, because we can’t rely on, say, monthly intervals as a good input in an environment this volatile.

Week Ahead

The Week Ahead – 08 Aug 2022: Low energy prices, China tech & stimulus, equity upside?

Post author By admin
Post date August 6, 2022

Learn more about CI Futures here: http://completeintel.com/2022Promo

Energy has taken a huge downside hit this week, in the wake of the OPEC+ announcement, US refining capacity utilization declining, etc. What’s happening? Why are we seeing differences between physical and paper crude markets?

Also, there was talk months ago about a new energy supercycle. Is that real? With China-Taiwan-US tensions tighter than they’ve been for years, we’re seeing Chinese tech stocks just muddle through. We haven’t seen a major hit – as if China tech will see major fallout from these tensions – but we also haven’t seen a major bump – as if China is expected to stimulate out of this to win domestic hearts and minds.

Also, could possible government intervention to solve China’s mortgage credit crunch be holding back the broad stimulus we’ve all expected for a couple of quarters?

Key themes:

1. Low energy (prices)

2. China tech & stimulus

3. Equity upside?

4. What’s ahead for next week?

This is the 29th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:

Tony: https://twitter.com/TonyNashNerd

Albert: https://twitter.com/amlivemon/

Tracy: https://twitter.com/chigrl

Time Stamps

0:00 Start

0:30 Key themes for this Week Ahead episode

1:51 Moves we’re seeing in energy markets – why there’s a fall?

3:39 How much of the energy moves is seasonal?

6:58 EIA computer “glitch” problem

7:24 What happened in the refining capacity now at 91%?

8:30 Capacity utilization fall – is this a statement about the denominator or falling demand?

10:14 Is the commodities supercycle happening?

12:13 China and technology – KWEB is not falling or rising

14:00 Will the Chinese government help real estate developers? Will that take away from possible tech stimulus?

16:58 Viewer question: Is there still upside benefit to SPY?

22:18 How will be the start of the Fed pivot — 25 or 50 bps rise?

24:45 What’s for the week ahead? Listen to the podcast version on

Spotify here:

Transcript

TN: Hi everyone. Welcome to The Week Ahead. I’m Tony Nash, and today we have Tracy Shuchart and Albert Marko joining us.

We’re going to walk through a number of topics today. First is energy prices, low energy prices. We want to understand why that’s happening and what’s around the corner. Next, we’re looking at China tech and potentially the stimulus in China and how that will impact tech.

Finally, we want to look at equities. What remaining upside is there in equities right now, given the environment we’re in? Before we get started, I would like to ask you to like and subscribe to the channel. Also give us your comments. We’re very active and respond to comments, so please let us know what you’re thinking. If there’s something else we should be covering, let us know.

Also, we have a promo for our subscription product, CI futures, right now for $50 a month. With CI futures, you get equity indices, commodities and currencies reforecast every week. And you get all of those, plus about 2000 economic variables for the top 50 countries reforecast every month. So please check it out on the link below. $50 a month for CI Futures.

Okay, so guys, we’ve had a really weird week with the Pelosi visit to Taiwan, geopolitics and the risk associated with geopolitics is kind of back on. We’re not really sure exactly how that’s going to resolve, but I’m really interested in the moves we’re seeing in energy, Tracy, and we’ve seen energy really fall throughout the week and I’m curious why we’re seeing that, particularly with crude, as we’ve seen geopolitics dial up. I know there’s not a perfect correlation there, but we typically see crude prices rise a bit with geopolitics.

TS: I think, it’s a combination of a lot of things. First of all, we’ve had which is ramped up to 200 million barrels being released to the SPR, which is fine initially, but we’re looking at the cummulative effect of this. In fact, we’re releasing so much so fast that now those barrels are actually finding their way overseas because we have nothing else to do with them. We can’t process that much right now.

And so we’re looking at that which is putting a damper kind of on the front end. We’re also looking at the fact that open interest is almost at the lowest in a decade, which means there’s nobody participating in this market. People are just not participating in this market.

In addition, we have physical traders that are completely nonexistent in this market anymore. They’re all trading via clear port on the OTC market as I’ve talked to actual physical traders, they don’t even want to be involved in this volatility.

And so that’s also taken a lot of open interest out of this contract. So this contract is easily pushed around because there’s just not of liquidity.

TN: How much of that is seasonal? How much of that is because it’s early August, late July, early August?

TS: It is seasonal. I will give you that because this summer is the summer lag. We generally see more participants in getting in September, and we’ll have to see how that kind of plays out.

But in general, the market is, this whole dive started in, was this market was factoring, we’re going to have this huge recession. Right? It’s going to be low berry session. Demand is going to go up.

And then we have this EIA discrepancy. The discrepancy was on gasoline demand. Actual gasoline demand versus what the DOE is reporting. Right? And ever since they had that “glitch,” where we had two weeks of no reporting whatsoever, those numbers suddenly changed.

And now they’re putting gasoline demand at below 2020 numbers at the height of COVID, which is to me,

not to sound conspiratorial, but to me, there’s just no way that we are below 2020 numbers. Right. And if you look at Gas Buddy demand, which is they look at a kind of a different look. What they look at is how

many gallons are being sold per station across the nation. And that’s how they kind of factor in what demand is. DOE is at the midpoint, right? So it’s like the midstream level. But those numbers should

eventually correlate. That discrepancy should eventually get together.

TN: So Gas Buddy is showing demand still growing, and DOE has it kind of caving. Is that correct? You know what I’m saying?

TS: Okay, yes. First of all, I think we need to look at the 914 numbers, the monthly numbers, which are definitely lagging. They’re too much behind, but they have been correct on production. Right? So I think they have weekly production at 12.1 million. Last 914 monthly report was at 11.6 million. So it is lagging information. But we have to start really looking at these weekly numbers and what the DOE is reporting and what they’re not reporting.

TN: If anything, what I’m seeing just observationally traffic seems to continue to grow. Like, I’m seeing more people going back into the office. I’m seeing more people take drives where they wouldn’t have taken long drives before. So what we’re seeing out of DOE doesn’t really match with what I’m seeing observationally. I could have selection bias, but it just doesn’t seem to match what we saw in April, May

of 2020.

AM: Tracy is absolutely spot on on that. I actually had a few people note that the EIA computer “glitch” problems set all this thing off in the DOE inventory shenanigans. It’s starting to gain more traction with everybody. It just doesn’t add up. When things don’t add up, bad data comes in, and it’s politically advantageous for the moment try to get gasoline down, going into midterms. I mean, Tracy is absolutely 1000% spot on that assessment.

TN: So, Tracy, I want to ask you a couple of questions. We’ve got a chart on refinery capacity utilization, and it shows capacity utilization at about 91%. So last month we were talking about being at 94%. Now it’s at 91%. What’s happened? Has the Denominator going?

TS: Well, that’s not actually a bad thing. Let me tell you that. Refineries operating at 94% 95% leads to a lot of problems. You’re going to see problems with maintenance, you’re stretching that capacity. Personally, I love anything over 90, 91. I’m much more comfortable with than 94 95%, which we got to, which is very stressing to me because you’re stressing those refineries, right. And that’s going to lead

to problems down the road. So for that to come down, it’s not a big deal to me, to be honest. Anything above 90, great. We’re good.

TN: Okay, so we’ve seen gasoline prices fall as we’ve seen capacity utilization fall. And so is that a statement about the, say, the denominator meaning the available capacity, or is that a statement about falling demand?

TS: I don’t think it’s a statement about necessarily anything. Okay. To be honest. Is the expectations around say that the gasoline price falling, is it expectations maybe around recession, but given the job numbers we got? Expectations about being around recession right when we’re seeing these prices fall. And I think we have a lack of participants in this market, especially lack of participants in the physical markets. The physical guys, like guys that trade for BP and Shell, which is where they’re just not in this market anymore because it’s too volatile, it’s too pulled around, and they can’t deal with that right now. So there’s nothing structurally changed about the physical markets right now.

You have to understand, too, is that the paper markets far outweigh the physical markets, meaning that there’s far more paper barrels traded than there are actual available physical barrels on the market

to be traded.

And when we look at a contract like WTI, which is actually physically deliverable, and we look at the market participants that are involved in deliverability, that is shrinking, shrinking margin, and then you look at something like the Brent contract, is completely just a financial contract.

So there’s a lot of hanky panky goingon in that market.

TN: Okay, now one last question while we’re on crude. Months and months ago, we kept hearing about this emerging commodities super cycle. And as we’ve seen commodities fall over the past few months, there have been some questions about is that really happening? So where are you? Do you think we’re in the early stages of another super cycle or do you think we’re just kind of modelling through?

TS: I actually think we’re still in the early stages of a super cycle. I mean, I think we’re kind of like I think my best comparison sake would be like, let’s look at the 1970s, right? And everybody’s looking at that ’73, ’74 when the oil embargo happened. But I actually think we’re closer to the ’67, ’69 era where we saw inflation kind of hit. Right. They tried to hide us into a recession, and then we had another peak in ’73, ’74 because issues with the market and then we have a third wave. So I actually think we’re only in this first wave of an inflationary cycle as far as commodities are concerned, okay.

Because we’re still in a structural supply deficit across not just the energy sector, but base metals, agriculture, et cetera. but you have to think your input cost for metals and for agriculture, it’s all energy.

So if energy is high to see inflation in energy costs, then you’re going to see inflation across all

of these commodities. We’re at $90. We were at negative $37 two and a half years ago. So to think that we’re crashing? You know.

TN: Okay, let’s switch over to China and technology and kind of talk through a few things with Albert. Obviously. Albert, we spoke earlier about Pelosi’s visit to Taiwan and US. China Taiwan affairs, and I’d recommend anybody view that that we published on Tuesday night US time. But I’m curious, Albert, as we look at and we’ve got KWEB up on the screen, which is an ETF of Chinese technology companies, it’s kind of middling. It’s not really falling. It’s not really rising. It seems like people are a little bit uncertain about what’s happening with Chinese tech. We have the closures of different cities. We have one of the big manufacturing cities that’s going zero COVID now.

And we obviously have the China Taiwan issues. What are your thoughts on China tech right now? And what should we expect over the next, say, two to three months?

AM: Well, over the next two to three months, I think China is going to be forced to stimulate. Once they stimulate names like KWEB, Alibaba actually, I really like Alibaba. There’s some good things happening there. I mean, the delisting stuff is a risk and it’s always been a risk, mainly because Gensler and Yellen have been trying to suppress the Chinese to stop stimulus because it hurts the United States and their plans to fight inflation.

So, yeah, I’m really bullish on KWEB. I really like it at 25 26 level. It’s not that far from where we are right

now. For the Chinese tech, it’s like, I don’t really think domestically, there’s too many problems domestically for KWEB. For me, it’s just all the delisting risk and that shot, the warning shot across the bow from the US.

TN: Okay, so when you talk about stimulus, I want to understand a little bit of the substitutionality of stimulus. So if we have this big mortgage crisis in China where owners aren’t paying their mortgages,

and that’s even worse on the property developers, and there are trillions of dollars at risk there, do you think the Chinese government will intervene and help those property developers? And if they do, will that take away from stimulus that could help technology companies?

AM: They will step in, but they’ll step in selectively for the most systemically important property developers. Not just the best connected, but the ones that touch the most debt and whatnot. So they don’t want things getting out of control. So for sure they will step in. I don’t think it will take away from the tech

sector at all. I think that the Chinese have been pretty pragmatic and diversifying how they get money into the system, whether it be other Asian countries, the US, Europe and whatnot. But they’re definitely in line right now to stimulate the economy going into the fall.

TN: Okay, great. If you’re trying right now and you’re talking about stimulus, that is to make up for kind of the COVID Zero close downs, but it’s also, I would assume, kind of winning some of those hearts and minds going into the big political meetings in November. Right, so you’ve whipped up nationalism with the Taiwan thing over the last couple of weeks and now you need bridge to get you to November. So you’re going to put out a bunch of stimulus to keep people fairly nationalistic and obedient. Is that fair to say?

AM: Yeah, that’s definitely fair to say. I think going even a little bit further than that is keeping the circle around Xi happy. That nexus of connected families that make money off the tech sector manufacturers. They need to be able to solidify it economically and stimulus will be targeted like that. And so when you say keep those families happy. You’re talking about skimming, you’re talking about sweet deals on contracts and that sort of thing.

TN: And I just want to make clear that doesn’t only happen in China. That happens in every country, right?

AM: Oh, every country you can imagine that happens. How politically connected with the donors, the political parties and so on and so forth. I just want to make clear to viewers. Like everybody.

TN: Yeah, I just want to clear to viewers, we’re not just picking on China. This happens everywhere.

AM: No, this is nothing negative towards China whatsoever. This literally happens in every country in every single country. Yeah.

TN: We had a question come in from a regular viewer talking about one of Sam’s calls. He’s not here, so he can talk behind his back today. The question was, Sam had talked about risks being to the upside a while ago for SPY, for the S&P 500. Now that we have had a mini rally, does he still see higher as the path of least resistance or is the risk reward fairly balanced here? I mean, we’ve seen a really nice uptick in the S&P and equities generally. Do you think there’s still upside benefit, or would you be a little bit hesitant in terms of the broad market?

AM: I’m bullish for a week, basically going a week, maybe two. I think that the CPI number is probably going a little bit lower than people think. And then all the peak inflation people are going to come out the woodwork and then they’re going to talk about Fed pivot, whether it’s real or not. I don’t think the Fed actually pivots. I think they just build a narrative of a pivot, if that makes sense, to rally the market.

But going forward, the economy is not a good footing. The job numbers are just not accurate. It’s a purely political headline for Biden going into the midterms. CPI is going to follow the same suit. They’ll probably have a 50 basis point rate hike in September and say that they’re slowing down. And whether it’s real or not.

TN: I want to question you just to push back a little bit. When you say the economy is not on a good footing, what do you mean? Help me understand how it’s done on a good footing?

AM: Well, the whole jobs? Listen, 20% of people don’t have a job. 19% of people have two jobs or more. You’re sitting there making this glorified headlines thatBiden is great for the job market and the economy, but it’s just not accurate. We have people that are struggling paycheck to paycheck more than any time in the last 20 or 30 years. So the underlying economy, forget about the top half that are millionaires that are buying whatever, the bottom half of the country is an absolute recession. So that’s what I’m saying the economy is not good.

TS: I mean, I totally agree with Albert. I mean, I’ll make a case for the bullish side. Let’s put it this way. So not a single trades work this year. Average hedge fund scrambling on how to salvage this year. There’s no other choice, really, but to get long. I mean, we have long going girlfriends been shell shocked. Font, shitty year. Value guys waiting to buy the dip in cyclicals. So I think that until when November comes and we have redemptions and these guys are faced with losing money from clients, I think that right now they have no other choice than to buy the dip, which is really interesting because that coincides with midterms. But not to put on my tinfoil hat there. So that’s my case for we may see a little bit higher than people that anticipate.

Even though I agree we’re still in a bear market. Albert makes a ton of good points, totally agree with

him 100% on that. But for the next few months, we may be looking at different kinds of things, especially because we also have the CTAs that are still super short.

So we have the possibility that we could see a short squeeze now if hedgies start

eating up the market and… This is exactly what the administration wants to see, because they want to see the S&P higher going into Midterm electric if it makes them look great. Of course.

AM: And Tracy is right. And this goes back into the oil numbers from the DOE and the EIA Shenanigans. They lower gas, they try to get inflation lower. They rally the market going into Midterms. It’s just the way it is. Now, going back to the economy, real quick, Tony, I see across the street the US consumer credit was $40 billion. I mean, people are spending and collecting debt like it’s going out of stock.

TN: That’s not a good number. You saw my tweet this last week about the $15 grapes. I mean, that sounds ridiculous, but people are having to. I talked to people about their electricity bills and they’re doubling and tripling over the last few months. And so people are having to do this. Rents are doubling in New York and so on and so forth. So it’s hitting everybody. And people are having to tap into consumer credit just to make ends meet.

AM: Just for the viewers, Tony, the forecast was 27 billion. It came in at 40.

TN: Wow. That’s a slightly overestimate, I would say. Let me ask you a quick question about the Fed pivot. Okay. You say the Fed is going to kind of act like they pivot but not actually pivot. So would that mean and I know everyone’s been on Twitter today or on social media saying, oh, the job’s number puts 75 basis points in focus again, all this stuff. But would the start of a pivot be 50 or 25 basis point rise?

AM: The start of a narrative of a pivot would be 50. But let’s just be honest. Inflation is not going away. They can fake a CPI number, maybe one, maybe two months. But come October, December, January, and inflation is raging, nine point whatever, 9.5%, 10%. They are going to have to keep going 75 basis points.

TN: So when you talk about a pivot, you’re talking about the beginning of a pivot, maybe a 50 basis point rise in September or something just to kind of ease nerves off a little bit?

AM: Yeah, that’s exactly what it is. It’s just the beginning of a narrative to move the market. It’s all it is.

TS: Okay, if we went 50 instead of or even 25 instead of 75, which the market is expecting, the barn market would freak out.

TN: Now what happens to commodities in that case, Tracy, if we’re in September and we go 50? You’re

going higher.

AM: Okay, this is the problem I keep telling screaming people and why I didn’t think that’s why I didn’t think this rally was a good idea is because all of a sudden now you’re going to create this stupid pivot narrative and do 25 or 50 basis points. But then, like Tracy just mentioned, commodities are going to rip. What’s that going to happen then? We’re going to have stage two of inflation coming around in 2023. That’s going to make this like nothing.

TN: Yeah, but as long as it happens after November, I think. Everything’s fine. Right. No, seriously, we have to think we’re in that. We’re in those closures.

TS: You have to think everything is political right now. So every decision is political right now and you have to factor that into kind of your investment thesis right now.

AM: Tracy’s absolutely right. I was just talking to a client. I said I don’t want to hear anything after November of this year. This era is this era right now. After November is a different era. We’ll talk about that accordingly in the next month. But until now it’s just a pure political game.

TN: What are you guys watching in particular for the week ahead?

AM: CPI. I think the CPI comes in a little bit lower than people expect and will rally the market for another 100 points. Like a seven handle or something? I think it’ll be a seven handle.

TS: I mean, everybody is watching CPI, I agree. I’m watching CPI as well. I think what’s really interesting going into this next week is I would start looking at Basin Industrial Metals and miners at this point because I think that they are lagging crude, they have been lagging crude oil. But we’re kind of starting to see a little bit of turnaround. So my focus really is going to be on base and industrial metals.

Week Ahead

The Week Ahead – 03 Aug 2022: Pelosi, China, & Taiwan

Post author By admin
Post date August 3, 2022

Learn more about CI Futures here: http://completeintel.com/2022Promo

There’s all this buzz around Nancy Pelosi’s visit to Taiwan. What is she doing there? Why all the stress? Why is China upset?

Also, Yellen got China to stop the stimulus. If China starts the stimulus, will that be a really good thing for Chinese equities? And what does that do for the CNY?

We also discussed the likelihood now with Pelosi’s visit that China will start stimulating. And what does that mean for oil and gas imports and Europe?

Will China try to hurt US companies that are in China? Do you think they could push against ex-pats in China and make life difficult for them? What are possible aggressive moves that China could take? Like cyberattacks?

There have been some potential whispers of China taking over some of Taiwan’s small islands to make a statement. Is that possible? And will they take it on other countries like India? What is the likelihood of China and the US in direct warfare engagement in the next twelve months?

Listen to Spotify here:

This is the 28th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:

Tony: https://twitter.com/TonyNashNerd

Albert: https://twitter.com/amlivemon/

Chris: https://twitter.com/BaldingsWorld

Transcript

TN: Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash, and we’ve got a special Week Ahead right now. We’re joined by Albert Marko and Dr. Christopher Balding to talk about the Taiwan-China issues around Nancy Pelosi’s visit.

Before we get started, I want to let you know about a special we’re having for CI Futures. We’re doing CI Futures for $50 a month. With CI Futures, we forecast about 2000 economic variables every month and about 900 market variables (currencies, commodities, equities) every week. That $50 deal is for the next couple of weeks. And you don’t even have to take a year-long commitment. For the next couple of weeks, you do it a month at a time, and it’s $50 a month.

So let’s get onto the show, guys. Thanks again for joining. I appreciate it.

I want to get into there’s all this buzz around Nancy Pelosi’s visit to Taiwan, and I want to take a step back and go, why all the stress? Why is China upset? Because I think there are a lot of loaded assumptions in the discussions that are happening. So can you guys talk us through a little bit, maybe? Chris, if you want to start, why is China so upset about this?

CB: So there’s the full history of the claim of Taiwan as Chinese territory. They refer to it as a Chinese province. That’s the general background. I’m going to assume that most of your listeners or watchers already know that.

However, if we jump ahead to this specific visit, to be honest, I’m a little bit mystified as to why this

specific visit has turned into this small crisis. Trump was sending a cabinet secretary and undersecretaries. There’s been a steady stream of Congresspeople to Taiwan. So why this specific visit? I think there’s very reasonable speculation we can go through those. But why this specific visit has turned into what it has, I think there are probably only a couple of people that could answer that question.

TN: Okay, Albert?

AM: Well, to expand on that, I can understand why the Chinese have a little bit more drama involved in this visit simply because the economic situation in China at the moment is so dire for Xi that they need a little bit of a distraction just to get the headlines out of the way at the moment.

TN: Yeah, I think that’s a good point. And when I think about this, it’s, yes, you can go back into all the history and the UNC, the 1971 and all of this stuff, but I think my view is democrats need a distraction for the midterms. You have the Afghanistan anniversary coming up, all of these things coming up. A bill was just passed that either does or doesn’t raise taxes on a lot of the population. There’s a lot of discussion around that.

Are we in a recession? Not a recession. I think this is a convenient foreign policy issue for Democrats to grab onto before the Midterms to raise some external issues that are a little bit more mysterious for people, a little more exciting. Will there be a war? That sort of thing.

And I think, Albert, you’re exactly right. With the November meeting coming up in Beijing, where Xi is supposed to be this golden boy and a lot more power and all this stuff, the new Mao or whatever, I think China’s economy is in a horrific state. I think the provinces and cities are not falling in line with Beijing, and I think politics in China is terrible. So I think this helps galvanize people in China, it helps galvanize people in the US. And I think it’s more of a convenient event than anything.

AM: It is a convenient event. Other issues are going on within China with the actual US.

Fed and Yellen are Yellen got them to capitulate to stop stimulus to fight inflation. So from the Chinese perspective, they’re a little bit they feel a little bit betrayed here. Seeing Nancy Pelosi

nude sunbathing on Taiwanese beaches, it’s like, what are you doing?

TN: Yellen got them to capitulate, to stop safely. So you’re saying Yellen got China to stop stimulus?

AM: Yeah. I don’t know if it was direct or indirect, but Xi warned them to don’t stimulate while we’re trying to combat inflation. Look what happened to the Russians. And from the Chinese elite perspective, looking at the oligarchs in Russia, being completely isolated from the rest of the world, that’s just something that a pill that they didn’t want to swallow, and they were glad to hold off stimulus up until this event. Now, I don’t know, after this event, the Chinese might renege on that gentleman’s deal, but we’ll see at this point.

TN: Okay, let me pursue that in a minute because that’s interesting. So if you’re saying that the Chinese were holding back stimulus because of a quiet bargain, and they reverse on that and they start, as I’ve been expecting them to do for the last six months, just dump truckloads of cash on the squares in Chinese cities, if they start doing that, that could potentially actually be a perfect thing for Chinese equities, right?

AM: Well, of course, but it’s negative for the US inflation and the commodities will start ripping. It’s an asymmetric shot against the US. So it’s something that they have in their toolbox and they haven’t used yet, but they certainly could after this.

TN: Okay, and so what does that do for the CNY, guys? If China starts stimulus, if it’s fiscal that appreciates CNY, at least from a textbook perspective, right?

AM: Yeah, from the textbook perspective, sure. They control whatever they want to set the CNY at, so, I mean, I can’t see them allowing it to shoot up too far just because they are an export-dependent economy.

TN: Okay, Chris.

CB: I just wanted to circle back to what we were talking about before jumping back to the CNY issue because this has been a real puzzle about they’ve been pretty restrained, and there are all kinds of questions as to why that is.

And again, I wish we could provide good, solid answers about that. I think a lot of the issues, like with Taiwan and stuff like that, I think there’s like, Tony, you mentioned the economy. I think that’s distinctly possible. I think it’s also one of those issues. If you go back right after the first of the year, they changed the language about reunification and how they were going to solve that problem for the new era.

What’s the new era? It’s Xi getting the third term. So is it possible that the economy is, like, pushing this along, egging it forward, so to speak? Yeah, I think that’s possible. I also think there’s much more like Xi has staked his credibility on, I’m making China great again, come hell or high water, if I have to drive it off a cliff to do it. That’s part of what you’re seeing.

AM: Yeah, I agree with Balding on that one. The only caveat that I would throw in there is that would be exactly the case up until the Ukraine situation where Russia got their butts handed to them. 30,000 troops lost, flagship battleship gone, sunk.

From the PLA perspective, it’s like, hey, what happens if we lose? Because it’s not a 0% chance, right? What happens if we get decimated? Our military could be set back 50 years, 100 years. And I think that at this point, it’s too much of a cost for them to take an adventure in Taiwan.

CB: Yeah. I will say you and I disagreed on this previously. Like, what were the risks? Let’s assume Ukraine had never happened. I would say there’s probably a not immaterial chance of something

happening with China and Taiwan in the next, let’s say six to 18 months.

At this point, I definitely would push that back a little bit. If something’s going to happen, I think, within the next few years. But absolutely. I think they’re going back to the drawing board because they see what’s happening to Russia in Ukraine, and they’re like, there’s absolutely no way in hell this can happen to us.

AM: Yeah, they saw Afghanistan as a point where they could probably take some territory away from the US sphere of influence. But then again, Ukraine happened, and that threw everything through, wrenching all the plans.

TN: Okay, so let’s talk about that a little bit. The Russia-Ukraine angle is interesting. So when sanctions were put on Russia, Russia can do okay without sanctions, not thrive, but can survive. But China is so intermingled in global trade that if sanctions are put on China, it could be very difficult for them. Right. Or what am I missing?

AM: It could, but they’re the world’s manufacturing base, so it’s like, you put sanctions on them, they’ll put sanctions, they’ll do something asymmetric, and it’ll hurt the West more than the West can hurt China, to be honest. I mean, The US can handle it. The Europeans can’t. They’re already in dire rates.

CB: The other thing that I would add to that is people make the sanctions argument. I don’t buy the sanctions argument for two specific reasons. One is basically what they import. The bulk of what they import from the rest of the world is raw materials. And that’s not coming from Western Europe, Japan, or other places like that.

Then the high-tech products that they do import, let’s say very high-grade chips, are going into things like iPhones and then being re-exported right away. Okay, so they’re not on an import basis highly dependent on the rest of the world.

They’ve made two bets with that in mind. Number one is that they can convince people not to block their exports, meaning Chinese exports to their country. Number one. And then also that other countries are so dependent upon them that they can’t. Okay?

What would happen to Walmart during the Christmas season if they couldn’t buy from China? Okay.

It’s a simple example, but it does throw a monkey wrench in there.

AM: Caterpillar is another one. The Chinese have done a marvelous job of using US agricultural companies against the US political system. So they’ve got a noose around them. Buick also. GM, Buick, Caterpillar. I can name half a dozen companies. Yeah.

TN: My main focus in terms of sanctions was food. These other things, of course, they’re importing goods, really, largely to be transformed and re-exported. Food is the main issue that I would think would be damaging to China, potentially.

AM: Yeah, that was always one of my main points of contention about a war starting with Taiwan is those ports being shut down in the eastern part of China, it would be devastating. They would have food and security problems. The Chinese middle class has been growing. They don’t want rice anymore. They want noodles and dumplings. So they have a persistent food issue that just gets worse and worse every year.

TN: Right. Okay, so let’s go into this. I saw Pelosi kind of pull up into that. I think it was the Grand Hyatt she’s staying at in Taipei. And really, what is she doing there? Like official, non Official. What do you think she’s doing there?

AM: That’s a pure distraction from the midterms in the economy in the US at the moment. It’s an easy distraction. They know China is not going to do anything outlandish. They’re a pretty pragmatic country when everything is said and done anyway. So it’s like, what negative is there for them, for Pelosi and the Democrats at the moment?

CB: Here’s the only reason I’m going to disagree with you, and you said something very similar earlier, Tony. Here’s. The only reason I’m going to disagree with you is that this assumes a level of evil genius out of the White House and maniacal thinking that I just don’t think they’re capable of, okay? Okay. Again, I could be wrong.

AM: I just don’t see these guys as the evil genius that says, hey, we need a distraction, what can we do?

I don’t think it’s an evil genius. I think that’s a little bit too strong. The game of scapegoating and distractions in the beltway is as old as time itself. The professionals at it. They can see what they want to do to pull people’s eyes away from one issue onto another and they have the media under their grips so they can do anything. They want to distract people. So the evil genius part comes in what are, steps 2, 3, 4, and 5 after this? Because now the Chinese can retaliate and I don’t think the US is prepared for that.

TN: In what ways?

AM: Well, I mean if the Chinese decide to start simulating next week and commodities start ripping, inflation in, the US is going to have a ten print, 10% print on CPI come October, November, then what? You’re in the smack middle of the midterms looking at 10% inflation and you’re losing 50, 60 seats in the House and you’re losing the Senate and then you have the Republican take over and start throwing out hearings against Joe Biden every week like they did Trump. It’s chaotic.

TN: Okay, so that’s an interesting scenario. Okay, I want to ask about that and then I want to ask another question about a potential reason for visiting. But you’ve mentioned that a couple of times. So what’s the likelihood, since they’ve said that they’ll undertake serious pushback, is there a likelihood that they’ll do that? Do you put that at a 50, 60, or 70% likelihood or do you think they’ll continue to hold?

AM: I think after this visit by Nancy Pelosi, it’s a greater than 50% chance that the Chinese start stimulating a little bit earlier than scheduled with commodities ripping.

TN: Okay, so that means more oil and gas imports, more pressure on gas prices, and diesel prices. All this would hurt Europe too?

AM: Oh, of course. Europe has got massive energy issues going forward and they’re unsolvable within six months.

TN: Okay, so so far I’m hearing potentially bullish Chinese equities and potentially bullish commodities, particularly energy, commodities, and industrial metals, right?

AM: Oh, absolutely, yeah. Full discretion, I’m going into KWEB. I have Baba at this low with this Pelosi landing. So for me, it’s just like Chinese equities have been battered with no stimulus. We’re down to the point. Yeah.

TN: Okay, so on tech, you mentioned tech. Is it possible that with the chips act just passing in the US, this is the one that supports semiconductor companies for putting operations in the US? Is it possible that there is a message being passed to TSMC or any of the strategic industry guys in Taiwan by Pelosi and her staff? Is that a possibility? And if so, what do you think it would be?

CB: Absolutely. I would say that that’s one of the things I don’t know if you caught this statement from the chairman of TSMC, but he gave an interview just a day or two ago and he said, “China, if you invade, like all of our plants on the island are dust, they’re worthless. There’s nothing there.” Because I can guarantee you that. I’m sure that the US Air Force would have the coordinates for every TSMC plant that it’s like, hey, we’re going to make sure that China doesn’t get them. I’m sure that TSMC, at this point, their reputation is being a pretty well-run company, very attuned to security issues. And so I’m sure that they have multiple redundancy plans and multiple security plans to address that if China is locked in. So you have to think that TSMC, all the way down to all their key suppliers and things like that, are in some type of meeting here with Nancy.

AM: Yeah. I’m not very keen on this chip sack bill. I think it’s just fireworks and stringers and ticker tape raid. But there are EPA issues to deal with when chip-making also. So no matter what, whatever they want to throw out for legislation, as long as the EPA is hampering manufacturing in the United States, manufacturing is going nowhere, at least for the next five to ten years in the United States. So this chip act, although it gives a little bit of pressure, don’t think it’s going to be that big of a driver in the next five to ten years.

TN: Okay. I want to talk to you guys a little bit about the pushback that China may give to US companies. So China already blocked a $5 billion battery investment from a Chinese company in the US. That was just announced today, and those batteries were supposed to support Tesla and Ford, I believe. Do you think China may try to hurt US companies that are in China? Could they directly take action against, say, Tesla or GM or Ford or GE or any of the American companies that are sitting in China? Do you think they could push against, say, ex-pats in China, and US ex-pats in China and make life difficult for them?

Because if we look, for example, at what happened in Russia, we have a lot of Western companies that have abandoned their operations in Russia over the last eight months. Right? Is it possible that American companies get pushback from the Chinese government?

Because if I think of what the Chinese government did to Japanese companies in 2012 if you remember that. It was very aggressive. They were instigating protests against Japanese companies, Japanese expatriates, and Japanese government officials. Could they instigate that against the US? Companies? And could they push us Companies to just give up their operations in China?

CB: Well, the only way I would rephrase that is how would that differ from normal standard operating practice? Even within the past couple of years, there’s been a massive flood of not just Americans, but all foreigners out of China. And these are everything from journalists to just basic school teachers, English teachers. Okay? So it doesn’t even matter if you’re a sensitive national or in the sensitive industry or what China deems is sensitive.

This goes for businesses as well. You heard stories about companies saying, oh, well, I have 10 million, $50 million of profits I can repatriate. I’m going to close down my China plant and go to Vietnam. And basically what they do is they just freeze everything and said, oh, you have an unpaid tax bill, coincidentally, the same amount of money that you were going to repatriate. And so they just have to walk away from everything or sell it for one dollar or something like that.

So when you talk about that, I think that’s entirely fair. I think that’s going to happen. I think the only people that are going to effectively remain there till the end are the Shells of the world that didn’t get out of Russia until the bombs and the missiles started flying. I think it’s going to be the same with China.

TN: Are you saying that you think some US companies will in the next, let’s say, two to three years, abandon their China operations? Do you think that’s feasible?

CB: Oh, yeah.

TN: Okay.

CB: I think it’s already been happening. It’s not announced. You see a couple of announcements here and there. You hear about many more talking to people that are still there. But yeah.

TN: Albert, what do you think about that?

AM: Yes, they will. There’ll be certain companies that they go after depending on whatever political calculations they can throw at the US, for sure, without question. They’ve done this. I mean, Christopher said they’ve done this in the past. Nothing new.

TN: Right. So how would that start? Would they try to push aggressively to localize leadership? I know a lot of that leadership is already localized, but would they almost make it mandatory for leadership of, say, US companies to be Chinese and then kind of cascade that through? Or what would the early phases of that look like?

AM: I think the early phases would be phantom tax violations or some kind of fines or fees that just pop up out of Chinese mountains. Who knows? Do you know what I mean? So I think that’s the first thing you’d want to look at if they start doing it.

CB: Yeah. And again, what you’re talking about, I think, is basically what’s been happening for the past couple of years is whether it’s the phantom tax bill, whether it’s all senior leadership has to be Chinese or party members or all those kinds of things. I mean, when you’re asking about that in the future, it is like, well, how would that differ from the past two to three years?

TN: Right. It feels like we’re on the precipice of that. And some of us have been talking about kind of the end of the Asian century for probably the last five to eight to ten years. And China is what seems slow, but very rapid decline in terms of its ability to grow. Not the fact that it’s not already huge, but its ability to continue to accelerate growth. That’s gone. Those days are gone. Right.

And when growth stalls out, the opportunity becomes a zero-sum game. And it’s about market share. It’s about getting your piece of the pie. Not a growing pie, but a stagnant pie. And that’s when things get very difficult in authoritarian countries. Right?

CB: Well, I think to add upon that, they were following the Asian growth model of build, in simple terms, run large trade surpluses, controlled currency, build apartments. It’s a pretty tried, true path. But one of the things that are very different is if Malaysia runs a large fiscal surplus, nobody cares. If Taiwan runs a significant trade surplus, some people care, but whatever.

For every percentage point of GDP in trade surpluses that China runs at this point when you’re the second largest economy in the world, that is a massive, massive number, not just against your economy, but against the global economy. And that’s going to create massive, massive dislocations elsewhere.

And then the other thing is that when your only source of growth is basically building apartments, and now they’ve got like 20% to 25% of these apartments all over the country, empty and household debt that is significantly above the OECD average. It doesn’t make any sense, and this is what they’re running up against. Okay.

AM: To take that a step further, it’s like if you have low growth and your economy starts in the waiver, how do you fund a growing military to combat the United States on a global level? The math doesn’t add up. Very difficult.

TN: Okay, I want to move next on to things like cyberattacks. Chris, I know that you’re very focused on kind of the IT side of what the Chinese government is doing. Can you talk us through some of the potential, maybe aggressive moves that China could take in the wake of this?

CB: Sure. So there are all kinds of things. And one of the things, you saw today where they were looking at, they shut down the Taiwanese Prime Minister’s website. But that’s, to be honest, small potatoes.

The type of thing that you would look at, and you’ve seen this a little bit in Ukraine is where they went after things like nuclear reactors and other things like that. So if you’re looking at this, one of the types of things that you would be looking at would be, for instance, Taiwan being an island, there’s a handful of spots where cables come ashore. So what would you be looking at? Because if you wanted to make it hard on Taiwan, that might be something that you would go after.

If you had the capability, and they are very likely due to some capacity, you would be looking at putting bugs in the TSMC type of production capacity. So those would be the types of things to narrow it to Taiwan. But generally speaking, if you aren’t being hacked by China, that basically just renders your place in the universe irrelevant, almost, because they’ve pretty much gone after everybody.

TN: Right. Albert, what do you think?

AM: Yeah, I mean, the Chinese are prevalent in the cyber terrorism space. They’re out there stealing trade secrets and corporate secrets all over the place, especially in the United States. And I don’t foresee that slowing down at all. If anything ramping up, and they’re good at it, and we have lacked security in the United States, and it needs to be tightened up.

TN: Right. And we intentionally, for the viewers, did not record this on Zoom. That’s an indication of some of the thoughts around there.

Now, guys, there are some islands between Taiwan and China, and there have been some potential whispers of China taking over, say, some islands, some of Taiwan’s small islands to make a statement. Do you think that’s possible?

AM: It’s possible. I don’t understand why they would try even risking that. What if they lose a few ships?

What if they lose 1000 or 2000 troops? It’s like all of a sudden you look weak and then you’re going to be forced into a position to do something bigger. It would make no sense from my perspective.

CB: The only reason I kind of disagrees is that there’s a handful of some of these very small islands, so I doubt that they have any military hardware there. And some of them are literally, I think, as close as like 10 miles off the Chinese mainland like that. They’re just that close. And so just as a symbolic act, something like that wouldn’t surprise me at all.

AM: It won’t surprise me at all. I’m just saying anything closer to the Taiwanese actual island, I would be wary of seeing the Chinese try to take them.

TN: I spent a week on one of those islands in 2009 waiting out of typhoon, and it was an experience, but I think it’s feasible. It’s an island off of Taidong, which is no, that’s on the southwest side. They wouldn’t do that. They would do it on the I was on the southeast side. They would do it on the southwest side or the northwest side. But there are lots of islands, very small islands off of Taiwan.

Okay, good. What else I think do we need to be thinking about here? There has been talking of the Biden administration removing trade tariffs and this sort of thing on China. Do you think that could be something that the administration aggressively goes after to kind of compensate China? Or do you think this would maybe solidify those tariffs?

AM: I don’t think so. Honestly, I would rather see what the rhetoric is around the oil market price cap that they’ve been talking about with G7 and the China terrorists might fall into that realm in negotiations. I would want to see what China’s reaction is to the oil cap at the moment.

CB: I’d be very skeptical at this moment of some type of tariff rollback because for them to… The White House has very badly managed this entire situation where they created a situation where if she went or if she didn’t go, they were losers. They’re not looking bad. And so if they were to roll back tariffs at this point, I think they would get they would get slaughtered, even among the Democrats at this point. So I think that’s very unlikely.

But look, Jake Sullivan is the guy that a decade ago was proposing, what do you say we walk up to China and give them back Taiwan in exchange for peace in our time? So with these guys, anything is possible.

AM: This is the worst foreign policy cabinet I have ever seen in my life. No one’s even close second at the moment. And that kind of commentary by Jake Sullivan is just unbelievable.

TN: Yeah. Okay, guys, so let me ask you kind of one final question, and you have to answer it with one of these two answers you can’t equivocate in between. Okay. The likelihood of China and the US in some sort of direct warfare engagement in the next, say, twelve months, is it closer to, say, 20% likelihood, or is it closer to 70% likelihood?

AM: 20% in my opinion.

CB: 20%.

TN: Oh, good. Okay, so do you think it’s greater than 20% or less than 20%?

AM: I’d say less than 20%. Okay. I would again say less than 20%,

CB: and I would say if you were to draw that out, 24, 36 months, I see it going up, probably steeper as time goes on.

TN: Okay, so that’s fair. So there’s a risk all around, right? We’ve got economic suffering globally. We’ve got inflation globally. We have whatever’s happening post-COVID trying to be figured out globally. We’ve got political uncertainty globally. So we’ve got risk and uncertainty everywhere. Adding a conflict to that mix would not be positive for anybody.

CB: And the one thing I would say is, even though I say less than 20%, that’s not like a firmly, deeply held conviction. Because if you’re talking about risk, I would have what I would call wide error bands in a lot of these situations. Look, we talk about, like, what is Xi going to do? Xi could say, hey, America is distracted by Ukraine. They got extra troops there. They’re shipping all kinds of weapons. Now’s the time to go to Taiwan. I don’t think people do that. That’s also not crazy to speculate. Yeah,

AM: I would have to agree with that because I never thought that Putin would try to take Kyiv with so few troops, but here we are, him making a vital mistake. And sometimes leaders make bad mistakes because they have a bunch of yes men around them. Yeah. Let me ask you one very quick question.

TN: Do you think there’s a possibility that China kind of takes it out on somebody else? Do they have a dust-up maybe with India to show strength at home while avoiding it with the US? Or something like that? Do they lash out to somebody else so that they can kind of flex muscles at home?

AM: Yeah, they could, but I mean, honestly, the Indians are not people to be trifled with, to be honest. They are itching to take on China if they show any kind of aggression. So I don’t see who they can pressure to say they’re big, bad China at the moment. I don’t even think they should be doing that. They should be figuring out their economic situation more than anything else.

TN: Xi Jinping’s role model is Mao. And Mao ultimately was a failure and a pariah in his own country by the time he died. Right. So I don’t think Xi has the sense to understand that Mao was a pariah by the time he died. And so that’s his role model who killed 60 million people through starvation and other things. So this is a problem. We have a guy in the office in China whose role model killed 60 million people directly.

AM: Yes, I understand that, Tony. The problem is the difference is that the CCP has wealthy families now that have almost equal footing as Xi in terms of power, and they can of them if they wanted to.

TN: Well, and that’s the reality, right? And that’s what nobody talks about. And that may be the backstop for a lot of this stuff.

CB: I’ll tell you this. The rumor mill among Chinese ex-pats, dissidents, et cetera, et cetera, are in hyperdrive this year. Look, it’s hard to know what to believe. It’s very hard to know what to believe. Okay? So I’m not about to push any theories, but there’s a lot of that discussion going around.

TN: Guys, this has been great. Thank you so much for doing this on such short notice. For anyone watching, please put comments below. We’ll take a look at them and we’ll watch them through the next week. If you have any additional thoughts, please let us know, and look forward to seeing how the next thanks a lot.

Week Ahead

The Week Ahead – 25 Jul 2022: Europe is a mess. What’s next?

Post author By admin
Post date July 23, 2022

Get 95% accuracy on your markets forecasts with CI Futures. Learn more here: https://cipromo.wpcompleteintel.com

We had a big week, with a lot going on globally. The president’s got COVID. Europe raised rates to zero, and so on and so forth.

First, we talked about Europe. It’s a mess, everyone knows that, but we talked through some opportunities there.

Next, we talked about aluminum. Industrial metals have been really interesting on the downside of late, but Tracy found something around aluminum that is really interesting.

And then we talked about tech, about Snap’s earnings, and what that could mean for other tech earnings coming up.

Key themes:

Europe is a mess. What’s next?
Aluminum supply shock
Tech SNA(P)FU
What’s ahead for next week?

This is the 27th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/samuelrines
Albert: https://twitter.com/amlivemon/
Tracy: https://twitter.com/chigrl/

Time Stamps

0:00 Start
0:50 95% on markets forecasts using CI Futures
1:44 Key themes for the week
2:34 What’s happening in Europe and what are some opportunities there?
6:37 Why did the European equity indices in the wake of the ECB meeting?
8:32 What can the ECB do moving forward?
9:40 Metals: what’s going to happen in the aluminum markets?
13:14 Will we switch back to goods in September?
16:50 Snapchat’s earnings and other earnings of tech equities.
21:06 Ad inventory element to tech earnings
23:16 Is there an opportunity for Meta to buy something like Snapchat.
24:21 The week ahead: Fed meeting next week

Listen to the podcast version on Spotify here:

Transcript

TN: Hi, everybody. Welcome to The Week Ahead. My name is Tony Nash. Today we have Albert, Tracy, and we have Sam doing a remote from his car because the Texas power grid can’t handle his house. So thanks, guys, for joining us. Before we get started, if you could please like and subscribe to the channel. When we’re done, and while we’re talking, please make comments, ask us questions. We get back to you during the week, and we really want to hear from you.

Also, I want to let you know about a promotion we’re having for our subscription product, CI Futures, which is a forecast platform for equity indices, currencies, and commodities. We are offering a $50 a month promotion for CI Futures. That is a short term promotion. So please check it out on the link right now and take advantage of that promotion. Okay?

We had a big week, a lot going on globally. The president’s got COVID. Europe raised rates to zero, and so on and so forth. First, we’re going to talk about Europe. It’s a mess, everyone knows that, but we want to try to find some opportunities there. Next, we want to talk about aluminum. Industrial metals have been really interesting, I guess, on the downside of late, but Tracy found something around aluminum that is really interesting. And then we’re going to talk about tech, about Snap’s earnings and what that could mean for other tech earnings coming up.

So first, let’s talk about Europe. Albert, you retweeted this tweet from HedgeEye earlier this week, talking about the 50 basis point rise by the ECB, and we’ve talked about it for months about the problems that Europe has if they raise. The problems they have if they don’t raise. And it was kind of a middle ground that they did. What are your thoughts on what’s happening in Europe, and are there opportunities there?

AM: Are there opportunities? Yeah, of course there are opportunities everywhere, Tony. You just got to be able to sit there and sift through the wreckage of what Europe is at the moment. Their economy is struggling. The 50 basis point rate hike, I kind of like, shrug it off. Surprise they actually did 50, but I kind of shrug it off. Their biggest problem is the dollar being elevated at the moment. It kind of helps them in the manufacturing sector for exports. But realistically, without China importing their products, what are they going to accomplish in the coming, like, two, three months? Probably nothing.

Aside from Europe speaking about the dollar being up, I’m kind of looking at Brazil and India’s next problem places.

TN: Okay.

SR: Yeah. And to that point, Albert, it’s a really interesting one, given it really doesn’t matter if you have great export markets if you can’t actually make anything.

AM: Yeah, I mean, the Europeans right now can’t make anything. They’ve got a labor problem worse than the United States at the moment. They have kind of COVID crazy policies still lingering. As soon as the tourist industry dies down a little bit for tourist season, they’ll probably come back in full force. So, I mean, it’s kind of a gloomy outlook for the Europeans at the moment.

SR: Power prices for the manufacturing engine in Germany.

AM: Yeah.

SR: If you’re not manufacturing anything, good luck selling something.

AM: Yes. I mean, even the stuff that they are manufacturing is going to be an inflated price that the world is not going to be able to even buy at the moment. They got food prices to deal with, not let alone energy prices. But didn’t European?

TS: It was a mixed message. No. Right. Yes. On one hand, they said, we’re raising rates to zero, meaning they’re not going to charge you anymore.

TN: Right.

TS: They don’t have negative rates. But on the other hand, they’re talking about bond buying program that they don’t want. They actually said, this is going to be kind of untransparent bond buying, which is fine.

SR: But that’s important and actually kind of a good thing, if you think about it.

TN: But the BOJ did right. The BOJ did that in 2014, 15, 16, where they bought up all the government debt and it just disappeared. And so is this a way for the ECB to disappear a bunch of government debt within the Eurozone?

SR: That’s what QE is.

AM: Yeah, of course. That’s like a standard thing, especially specifically for the Europeans. They love to hide debt and reissue it elsewhere, longer dated and whatnot. They love to kick the can down the road because they know that the United States is going to bail them out anyways at some point.

TN: Sam?

SR: Yeah, it’s exactly what they’re going to do. In my opinion, it’s kind of brilliant because in a way, you don’t want everyone to know how much Italian debt you’re buying, and they’re going to buy Italian debt, they’re going to buy Greek debt. And then, believe it or not, if we continue to have these kind of problems in Germany, guess what? Germany is probably going to be a huge beneficiary of the debt buying program. So it might be the first time in a long time that we don’t hear Germany complaining about it.

TN: Right. So I just want to be clear, they’re not hiding that they’re actually buying it to retire it. Right.

AM: Tomato, tomato.

SR: They’re not necessarily directly retiring it. They’re just buying it and holding it to maturity.

TN: Exactly right. Which is exactly what the BOJ did in Japan five years ago and they continue to do, actually. Okay, very good. So one last question on that. Why did European equity indices rise in the wake of the ECB meeting? Was it because of this debt issuing?

AM: I think..

TN: was distracted by Tracy. Was it because of the debt program?

AM: Yeah, the non transparent bond buying, and seems like the ECB is going to try to keep the market at least elevated, but, I mean, it was crushed so much that bottom feeders just started to come in in my opinion.

The only companies in the European Union right now that I would even think about are the ones that have ADRs in the US that have more revenue based in the US than anything else.

TS: I think what got them excited is because you saw a spike up in the Euro temporarily, so people started buying into the equity market. However, that’s going to be very short lived, I think still we are going to see inflows to the US market from all of these other markets, but there’s really no other place to go right now.

TN: Right.

SR: There’s also the problem of markets are forward looking and it’s so bad in Europe and it’s all priced in that at some point you get a mechanism where it’s not as bad as it could have been. And that to a large degree, looks to be what’s going on right now.

You’ve got the Euro almost at par. You’ve got an economy that is absolutely in the toilet. Everyone knows that. And it’s all priced into the equities. So if you begin to see a bright light at the end of the tunnel, there’s the potential for a significant rally there that could be kind of face ripping.

TN: Oh, yeah, great. Yes. So the position that the ECB’s in, what can they do going forward? Do they continue raising at small increments or are they kind of one or two and done? What possibilities do they have?

AM: I think they’re only one and two and done. I don’t think they can really keep raising rates like the United States right now. That would decimate them.

TN: Okay.

SR: 100%. One or two and done. And by the way, that kind of lines up with where the US is probably going to be done.

TN: So let me ask you one final question on this. If you’re an American company and you have a vendor in Europe and you’re paying Euros, would you long those contracts, get them locked in and euro prices as long as you can right now, do you think the Euro at Parity is a short-term anomaly?

AM: I think it is, yeah.

SR: Yes. And by the way, you can’t no European companies that dumb. That’s worth doing busines.

TN: I think you overestimate. Okay, that’s good. That’s good. Okay, perfect. Great.

Let’s move on to metals. Tracy, you posted a great graphic on and had a great discussion about aluminum and some aluminum factories that are shutting down largely because of power prices. Can you help us understand that situation and help us understand what’s going to happen in aluminum markets?

TS: Yeah, I mean, if we sort of look at the aluminum markets right now, the big thing is that because of the power crisis in the EU, right, we’ve seen almost 50% of their smelter market come offline because they just can’t afford it anymore. We’ve also actually seen this drift to the United States. We just had Alcoa shut down one of their lines in Indiana. So this is a global phenomenon.

The problem is that we’re short of aluminum by a lot. Because if we look at this energy transition, and I think I stated, particularly if we were looking at because the drivetrains are so heavy, you need a lot more aluminum to produce these vehicles, we’re looking at a deficit.

We’re already in a deficit. We’ve seen a 30% pullback in this market. We’re in a deficit. We’re going to be headed to worst deficit in H2 of ’22 and into 2023. And actually, if we look forward all the way until 2025, what I’m thinking is this pullback in the market has been a little bit overextended, over recession fears. Right. Huge pullback in the metals markets. Huge pullback and slightly pullback in the energy markets. But really, if we’re looking at these based on industrial metals, especially ones that are particular to energy transition, I think this move is a little bit overdone right now. I think there are opportunities to be had because we are looking at structural supply deficits across many of these metals, aluminum in particular.

AM: You know it’s interesting. It’s interesting. That just came to my thought of Tracy talking is utilities have given up every gain that they’ve had for the year, come right back down. Even some of the wheat and commodities just came down. Unbelievable. Dollars surge, futures crushed. It’s stunning. But I believe, just like Tracy says, I believe it’s all oversold at the moment.

TS: It actually is. Even if we take in a scenario where DM markets go into somewhat of a recession, we’re still in a structural supply deficit. So even if we’re in a recession and that takes a particular amount of demand out of the market, we’re still at a deficit.

TN: Okay. So I want to be careful with recession and not to kind of push back on you, Tracy.

TS: I’m just saying because everybody’s throwing that word around right now.

TN: So we can have a slowdown without having a recession, right?

TS: Correct. Absolutely. And I wouldn’t say that we’re necessarily in a recession, but things could get a lot worse in Europe or whatever. But even with taking that demand out of the picture, if we look at it as in we do have a recession in the market. “If”. Right.

TN: Right. So Sam has written quite a bit about the kind of switch to services over the summer from goods and Sam, do you see us switching back to goods, say, in September, October, from service says is that kind of a pretty dramatic switch from one to the other?

SR: No.

TN: Okay, so what happens? We switched. Goes to services over the summer, does that end what happens there? Because I’m curious.

SR: Yeah. No, you continue to have services be the dominant factor, and the services tended precovid to be the dominant factor.

TS: We talked about this a few weeks ago.

SR: Exactly. It’s one of those where goods probably don’t fall off a cliff because at some point you do have to have a comeback outside of the US. In goods. So that’s somewhat of a tail end. You have a reopening in China, you have a reopening in Europe, you have some sort of resolution to the Ukrainian conflict. You begin to have some tailwinds for Goods, but it’s simply not what I would say is kind of back to the coveted, like, goods model that was goods driven, everything was great, blah, blah, blah. No, it really does look like it’s kind of a summer of party, summer of vacation, summer of get out there. We didn’t have vacations in 20 20, 20 21. We’re going to go in 2022, and we’re going to go back. That appears to be the case, and it appears to be playing out. The question is, does that continue as kids go back to school? Probably not. Does it continue as people go back to work in the office? Probably not.

In the fall, you get kind of the current trajectory in Goods, which is back to normal somewhere around a 1% growth rate, and in services back to normal one to 2% growth rate, maybe a little bit more. It’s not a bad thing, but it’s certainly not the boom in goods that we saw over the past year and a half and the boom that we’ve seen services over the last six months.

AM: No, I was thinking about what Sam is saying. There’s a risk here because if the Fed pivots a little bit too early, which everyone thinks they will, and then goods start coming back online and demand still elevated, we could have another inflationary event going into 2023.

It’s like you make policy mistakes and the economy is still red hot at the moment in all sectors. As much as they want to try.

TN: To cover, it’s not red hot because people use the recession word all the time.

AM: Why?

SR: The only pushback I’ll give there is that I would say the interesting thing is that goods come back online in a pretty big way, and if you just have steady state current consumption levels, it’s not a boom. Right. It’s still going to be deflationary or disinflationary on the margin. If you don’t have a surge in the demand for goods, and it’s hard to see where you’re going to have that demand surge for goods in an elevated services environment. Right. So that could actually be the fault signal that makes the Fed back off as we go into the back half of the year.

TN: Interesting. Fantastic. Okay, great. Speaking of signals, let’s look at tech for a minute. Sam, you have the most mysterious newsletter in the US. And newsletter today talk about snaps earnings. And I put a snapshot of your newsletter on the screen looking at average revenue per user for Snap. Can you talk us through some of that? Some of the earnings work for, say, Snap and Twitter? What does that mean for tech generally?

SR: Yeah, it’s interesting. We all kind of know that tech, particularly smaller tech, the startup VC type act companies have been struggling, right? You’ve seen Layoffs, you’ve even seen the big guys. Microsoft, you’ve seen Meta, you’ve seen parts of salesforce have hiring freezes. So we know that there’s been a little bit of underlying problems with the overall tech world in terms of employment.

There are only two ways that you can really solve the problem of slowing revenue growth if you want to drop money to the bottom line, whether it’s or earnings. And that is you can lay people off and you can cut advertising spent. And so Snap and Twitter are kind of, what?

TN: PG and E? Travel and expenditure as well. Travel expenses.

SR: Well, yeah, travel and expenditures. We’ll get there because I hit that later on the night. Perfect. As you know.\

TN: Yeah.

SR: The problem with Snap and Twitter is basically what you saw was great user growth, right? Better user growth than I think anybody really was anticipating. The only issue was that they didn’t monetize it. There was nobody really backing up on the advertising front. Right. We all know that Peloton and all those guys were cutting back on ad spend, carvana basically bankrupt crap company. These guys were cutting back on ad spend, and they were the big marginal drivers of growth for those platforms.

So when you cut back on people in ads, you begin to actually be able to drop something potentially to the bottom line, or at least survive a downturn in VC spent. That played through with Snap and Twitter in a marvelous way. But then to your point on travel and entertainment, you get to the earnings of American Express, which is a great way of getting kind of a peek at upper middle and upper class spending and business spend. And those could not have been better earnings. I mean, if you’re telling me that the consumer is in a recession, it is the bottom half of the spectrum that’s in a recession, if anyone is in a recession. Those were massive earnings numbers, massive spend numbers on a year over year basis. The chart that I sent out was of the spend by bracket of age, and millennials and Gen Z are the biggest spending boost.

AM: Luxury items still are unbelievably hot right now. All the earnings are just beating all estimates.

SR: But it’s the pivot. It’s the pivot, right. Peloton all that crap that we had in Silicon Valley that was overvalued, that everybody bought and everybody thought was cool, everybody bought it. They’re already done with it. You don’t need to buy three peloton bikes, right? It’s the problem with keurig. We all remember the whole Green Mountain coffee thing. It’s the same problem, right? Once you buy it, you don’t have to buy five Turks. You don’t have to buy five Pelotons.

The ability to monetize that over time is something that I think people kind of get a little iffy with. That’s really what I think is smacking right now, and it’s smacking in a pretty real way, and it’s not going anywhere anytime soon.

TN: Okay, so we also have new ad inventory coming online in a big way with Netflix, right. So can you talk about that side of the ad inventory element a little bit?

SR: Sure. You have a ton of ad inventory, right? If you want traditional media, you can go to traditional media. NBC, CBS, whatever. If you want online, you have Facebook, you have Instagram, all part of Meta. You have TikTok. You have snapchat. We can go down the list forever.

Netflix is basically trying to save their business with the greatest dumb quote in their earnings release where they said, our great content is going to have a premium CPM. The way that we measure advertising reps, they’re amazing content. Are you kidding me? No, I mean, they’re going to be competing with Twitter and Snapchat, which is the bottom of the barrel in terms of advertising revenue.

TS: Took that model and extrapolated on it. Right. So now you have maybe they were the first, but now you have everybody else doing it, especially very independent media. Right. That is starting to gain traction.

TN: Exactly. Things like plumbing and that sort of thing. And Hulu’s done that really well as well, inserted advertisements. So the only thing worse than new Netflix content is new Disney Plus content.

SR: Unless you have kids, it’s a lifesaver.

TN: Yeah, it may be a lifesaver, but the old content is good. The new content.

AM: I don’t know, the content on Disney nowadays is kid friendly. Okay.

SR: I didn’t say it was kid friendly. I said it was a lifesaver.

TN: Yeah, but you’re right. I mean, there’s a huge amount of ad inventory and they will be competing with Netflix. They are already competing with Hulu, those sorts of guys. Is there an opportunity for somebody like Meta to buy someone like Snapchat? Would they want to do that?

SR: They tried years ago to buy Snapchat. And why would you like…

TS: Why would you buy it?

SR: Yeah, I mean, that’s the key. And I think that it’s the reason why you can have a 30 plus percent down day and call it a company that has something interesting and something that nobody’s done before. Because I’m sorry, it’s only fans, but without subscription revenue.

TS: They have no real model to make money. That’s the problem. Without subscription, no solid revenue model.

AM: I’d buy an only fans IPO all day long.

TS: I wasn’t talking about only fans, I was talking about Snapchat. No idea about ole fans. Never been on there.

TN: All right, guys, very good. Now let’s just segue to the week ahead. What are you guys looking for in the week ahead? We’ve got the fed meeting next week, right? So that’s going to be all the talk all week long. So what’s going to happen there?

AM: I think they try to get us to the bull bear line of 40 20 or 40 30 in that range and linger us there until the Fed meeting. I think Jerome Powell is pretty much his last chance to be hawkish, because I don’t think there’s not another meeting until September at that point, like, the Fed already are talking about pivoting by then. So this is probably their last chance to be real orkish.

TN: Okay. No, go ahead. Sorry.

TS: I think as far as the energy market that’s concerned, we’ll probably see oil, gas pretty much sideways for the week, just as we have been seeing. And I think I’m very interested in the metals complex the first time in a very long time. So I think we might see a slow kind of interest in that market next week.

TN: Interesting.

SR: I think it’s going to be interesting to see how the market interprets the feds forward view, honestly. We all know they’re going 75. It’s already there. It’s already priced in. I think it’s going to be very interesting to see how the fed begins to look out to September and beyond, and the market is going to begin to really price that in. And so you could see some pretty big whipsaws in the dollar. You can see some pretty big whipsaws on the long end of the curve. And equities in general, I think equities could see the most volatile week, even though it’s the most predictable Fed raise in a couple of meetings, I think you could see some incredible volatility and some really interesting outcomes.

TN: Yes. Very good. I can’t wait to watch. Guys, thanks very much for your time. Have a great weekend. And have a great weekend. Thank you.

TS, AM: Bye. Thanks.

TN: Okay. I forgot to put you on mute. I apologize, Ready?

Tags ADR, boj, Brazil, China, ci futures, DisneyPlus, ecb, Euro, Europe, european union, Europeans, Fed, germany, Netflix, Peloton, Silicon Valley, snapchat, The Week Ahead, TikTok, Twitter, US, week ahead

Week Ahead

The Week Ahead – 27 Jun 2022: The “R” Word

Post author By admin
Post date June 25, 2022

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Powell was out saying “I don’t think a recession is inevitable” but also admitted that rate hikes may be one of many factors that push the economy into recession. All of this while bank credit continues to grow, which we saw flatten in 2020 and decline in 2008. What’s happening? Is a recession inevitable at this point?

We talked about the dollar two weeks ago and the strength is still there. Are we pushing higher so commodities feel a bit cheaper to Americans? Is this temporary – mainly so Americans talk about cheaper gasoline over the July 4th holiday weekend? How far and how long do you expect the dollar to go? Why?

Can crude continue to rally into a recession?

Key themes:

The “R” Word
Geopolitical fallout
Crude 💪 or 👎/ Dollar 🚀
What’s ahead for next week?

This is the 23rd episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Tracy: https://twitter.com/chigrl
Albert: https://twitter.com/amlivemon/

Time Stamps

0:00 Start
1:03 Key themes for the week
1:48 Powell’s recession call
3:48 The catalysts that could whip growth
6:58 Geopolitics in EMs and related to the US
8:35 Is the ECB a risk as well?
11:00 Crude and the Dollar
16:00 Where do you expect the dollar to go?
19:00 The week ahead

Listen on Spotify:

Transcript

TN: Hi, everybody, and welcome to The Week Ahead. I’m Tony Nash. We’re joined as always, by Tracy, Sam, and Albert. Thanks, guys, for joining us. Before we get started, please, like, please subscribe, please comment. We read all of them and try to respond to all of them. So please go ahead and do that while you’re here. Also, we are running a summer promo for CI Futures. This is our market forecast subscription product. You get three free months, so please go to completeintel.com/2022Promo and learn all about it.

So this week there’s a lot going on, a lot politically in markets, other stuff. We’re talking about three main themes this week. First is the R word. Second is geopolitical fallout of the R word. And third is crude and dollar activity. So I ran a poll earlier this week asking what is the most widely held consensus view that people are seeing right now? And that’s on screen, of course. So first is recession. People are seeing recession as a consensus view all over the place. Next is equities lower, followed by crude higher, followed by a stronger dollar. So we’re going to talk about all these things today.

Sam, let’s talk about that recession call. That recession consensus call. Powell is out this week saying, I don’t think a recession is inevitable after being really hawkish last week and driving people kind of to the edge of this. So what’s actually happening right now? We’re seeing credit continue to grow. And I know I showed you earlier this week. Bank credit continues to grow. Is that meaningful? And what are you looking at to know if we’re going into recession or not?

SR: Yeah, I mean, bank credit, is meh. But at the same time, are we going into a recession? Meh. I don’t really think so. It’s a booming summer. You have hotels full, you have bars and restaurants full. You have airlines unable to keep up with demand. I mean, that sounds like a small subset of the economy, but at the same time, that is a massive portion of the summer economy. It’s massive. So do I think we’re imminently in a recession? No. I actually think that’s one of the big narratives that kind of misses the bigger point, right? Do we make goods? No, we don’t make anything. What we do is we have services. That’s it. So we’re a service based economy. If services are booming, you’re not going into a recession. You’re unlikely to see some sort of huge move in unemployment because a recession technically is down on growth, down on employment.

If you don’t have the down on employment, you don’t have a recession. So maybe you have a slowing of growth. That’s somewhat probable. But a recession, no, not in the cards, at least until the back half this year. In the back half of this year, you have a number of catalysts which could really whip things the other way in terms of both growth.

TN: Okay, so what are some of those catalysts. And when you say back, you’re talking about October? November?

SR: Yes, October. November.

TN: My thinking is if we’re going to see it, we’re going to start seeing it maybe late September, October or something like that. But what are some of those catalysts you’re talking about? A couple of them?

SR: The catalysts then are actually to the gross side, which I think is where I’ll take the opposite side of a lot of people. Those catalysts are called a devolving of the Ukraine conflict. Number one, while that doesn’t take off sanctions in the near term, it does take off the incremental oops.

Then you have the beginning of the reopening of China, which is a big boost to growth in Europe, and secondarily, LatAm and the United States. So you put those pieces together and all of a sudden you’re looking at a back half of the year that has more upside catalysts, potentially. And it’s not like you can reset down China and it’s going to be a negative callus. It’s already in the numbers. It’s not like you can have another war in Ukraine that’s already in the numbers. If you begin to have those two come together, guess what? That’s positive. So I would say the rest of this year is shaping up to be oddly positive.

TN: Yes, but no, I’m kidding. Everyone’s so negative right now. Everyone wants to just find the downside. Russia is going to invade finland or something like that, right?

SR: Yeah. Here’s the play. I would say 3600 is a lot less likely than 43.

TN: I like that.

SR: On the S&P.

TS: I think what we’re going to see is kind of like a balance, right? Where we see services really big this summer, especially in the travel industry, hospitality industry, which we will see taper off this fall, which is not unusual. That always tapers off this fall. But we also see airline prices increasing, so people have booked their summer vacations in Q1. Those people are going to fall off. So I think we’ll see a push. We’ll see a pullback in that industry, but we could see growth in industries that Sam is mentioning.

TN: Great.

SR: Just to throw in there, we have to remember that at some point we have to refill supply chains on the drivable stuff, and those supply chains are at bone zero right now. It will require a whole bunch of employment, a whole bunch of production, and will actually have a fairly significant thrust to GDP. Our production has been zero.

TN: That’s great. My poll is wrong, which is awesome. I love that.

SR: I would bet against every single thing that your poll said.

TN: Perfect. I love that. Okay, so if you’re in the US, that holds. But let’s switch, Albert, to kind of say geopolitical risk and some other things. Obviously, Sri Lanka two months ago started falling apart and not started, but really fell apart. We’ve seen Ecuador and other places really start falling apart.

Albert, what are you seeing, geopolitically, and what are you seeing in EMs related to what’s happening in the US?

AM: I don’t really like focusing on EMs at this moment just because they’re not big enough to really cause a problem in the markets. In my opinion. I’m looking squarely at the European Union right now.

It’s suspicious that we come out with US bank tests and then we come out with EU bank tests and then literally a day later, the Germans come out and say, we could have a Lehman moment across the economy just because of these gas shortages that are happening.

TN: By the way, your tweet about the German Lehman moment up.

AM: Yeah. And this goes back to just the topic we were just talking about, recession. You really need some kind of catalyst or something to break. And the only thing that I could even contemplate of breaking and causing a “recession” would be the European Union going through another financial crisis. You have a contagion that probably leaks over to the United States financial markets and the Putin price hikes become a thing again, justifies any kind of QE that the Federal want to do, probably in Q four this year. Geopolitically, the EU is my target right now to look at.

TN: Okay. It’s energy supply chains. Is the ECB a risk as well? Is there a risk that they tighten too fast or too much or anything?

AM: How are they going to have to I mean, the inflation over there is climbing just as fast as the United States and it’s causing problems across the board.

SR: I would double down on that and say that Qatar, right after we had the train go down in Corpus Christi, came out and said, yeah, we’ll send gas to the European Union. Just sign a 20 year deal.

TN: Right. And they did. Right?

SR: European Union is not going to do that. I mean, nobody in Europe is going to do that. It was kind of like, we got your back, but give us a long term agreement and we’ll do it.

The irony of it is that you have a crisis going on in Europe. There was a dragon moment of do whatever right, anything.

TN: Sorry, Tracy. What’s that?

TS: Self imposed crisis? Their energy crisis is literally self imposed.

TN: Yeah. Okay.

AM: There’s no question that is self imposed. The European Union’s leadership has been atrocious. I mean, they’ve had the worst energy policy you could possibly think of that hampers their economic engine for the last two, three decades. I mean, you can just throw a dart at the board and pick whatever policy they’ve come up with. It has been an absolute disaster.

TN: Why is that? Why are they making such stupid well.

AM: They’ve made such a big swing to the left, the leftist voters, and they’re just climate Nazis. They won’t even discuss nuclear.

SR: We’re literally talking.

AM: They won’t even discuss nuclear power, which is absurd. They’re like, what if something goes bad like Fukushima? Oh, yeah. What if a dam breaks? Or what if a coal plant blows up? Or, God forbid, what if 10,000 Germans freeze to death because you don’t have gas stored because you didn’t have any proper management? I mean, they’re really bad at managing what’s going on without the United States holding their hand and directing what to do.

TN: Well said. Fantastic. Okay, so since we focus a little bit on energy there, Tracy, let’s swing to talk about crude and the dollar. So, our friend Josh Young posted something about kind of energy could potentially outperform this sort of stuff and really kind of looking back to the 1970s.

So it really looked like we were heading there until this week, and then we saw things really come down this week, in terms of, say, WTI, natural gas, other things. What’s going on there?

TS: I think it depends on what you’re looking at. If you were looking at frontline crude oil price, that’s one thing where a lot of speculators are involved in. If you’re looking at the spreads, it’s you’re looking at the crack spreads that are still exploding. If you’re looking at calendar spreads that are up again this week, that pretty much tells you that we put a floor under front month crude price, regardless of who is involved in what specs are involved in the industry right now. Because the spreads are really what I consider will tell you really where things are going. Right.

So we kind of have a floor night. Yes, oil had a bad week. We saw a lot of selling on downtime in markets and things of that nature. I don’t think that doesn’t change the overall fundamentals of the market. Right? I mean, we’re still fundamentally structurally undersupplied.

TN: So I’m going to ask a really dumb question here. I’m sorry if I may hear it.

SR: But we know.

TN: So are we seeing a short term sell off? Is it politically driven so that when Americans get together on July 4, they can say, gosh, gas is really down this week, and then you have a three day weekend where people are talking about that and then it rocket ships up after the fourth?

TS: Well, I think it’s a combination of most things. I think this week recession scares, we’re really the big driver for that market because everybody’s thinking we’re going to have a recession.

SR: That and the potential of having an export ban.

TS: Right.

TN: Recession, export ban, and July 4th.

TS: An export ban. That said, and I kind of tweeted this out, having an export ban, especially a fuel export ban, would make things obviously worse.

First of all, it’ll raise prices for the EU prices abroad, which after all of this with Ukraine, do we really want to hurt the EU that much? Because we supply them with one to 1.3, 1.5 million barrels per day of diesel, which they are having a huge problem. So really, are we going to abandon the you at this point? Also…

TN: My Texas friends would love to have more diesel to power their ram trucks.

TS: But the thing is that what happens is the fuel flows get so disrupted is that we’re going to have to see refineries cut run significantly in the US. Which is going to ultimately raise prices. We may see deepen prices initially, but you’re going to see higher prices ultimately.

SR: I’ll push back on that because you have a lot of storage, but you didn’t have a lot of storage before. So you don’t have to cut back on runs. You can put into storage at a pretty profitable rate because of forward selling basically all of your inventory right now. I would push back on you have to cut runs at this point.

TS: And I’m going to push back on that. We have to look at the east coast. Right. And so that’s looking at gasoline runs to make a barrel. Diesel requires a lot more oil than it does say to make gasoline. And so if we see a diesel problem, we’re going to have to cut back on this runs. I think it depends on what coast you’re looking at and what area you’re looking at.

TN: All we care about is Texas and Florida. Right.

SR: You have a lot of places to store gasoline. I mean, it’s not like we have an oversupply gasoline at the moment.

TN: It’s true. Our bob’s down this week too, right. So it’s tight.

AM: It’s interesting, Tony, it’s funny. One thing that you said July 4 and one thing that Tracy said, thinly traded is that hilariously every time we need a rally in the market during the thinly traded holiday hours, crude goes down, dollar goes down and the market goes up almost by magic on the thinly traded holiday hours. Something you should watch.

SR: University of Michigan. Come on.

TN: It’s a big driver. University of Michigan. Okay, so let’s move on. You mentioned the dollar, Albert, and so if we look at the dollar, obviously it’s near highs for the decade and that’s great if you’re in the US buying dollar denominated commodities. But elsewhere in the world it’s really hard. Right. So where do you expect the dollar to go? I can’t remember what you’ve said your expected target is. Possibly? 110. Possibly 120. So if it hits 120, Japanese Yen is at what, like 160? 170? something like that?

AM: 163,164? My calculation… This is something Yellen has done in 2012. It’s nothing new. She’s driven the dollar up. She’s out into Europe talking that she’s going to take the dollar up to 110. So this is nothing new. Everyone knows what’s going to happen. Everyone’s watching it. So we’re at 104 something today, just sitting there and hasn’t really done anything. Last day or so. Another 5% up is not a big deal for the dollar.

TN: So you see Yellen driving a stronger dollar. Sam, what do you see?

SR: I would say that I hate taking the other side. I’m going to take the other side.

TN: Great.

SR: I’m going to say that Yellen’s ability to control the dollar is de minimis at this point, mostly because the Fed is tapped out. But you already had a 4% terminal rate for Fed funds priced in two weeks ago. Today you’re sitting at basically 3.65%. So you’ve got the peak, in my opinion, priced in for the FOMC hiking cycle and now you’re on the other side of that. So I would say JPY, you’re probably looking at above 10.

TN: Oh, wow, okay, great.

SR: And you’re probably looking at a Euro at 108. 109. And it doesn’t really matter if they go into a recession because they’re… Right. The US is going to back off in incremental steps the long end of the hiking cycle and…

TN: Perfect.

SR: The dollar prices is long end of the hiking cycle and Yellen can do a lot of things. What she can’t do is increase the internal rate.

TN: That’s great.

AM: The thing is, the treasury sets USD policy, so she can certainly drive it up. I don’t know how much ammo she has left because it’s gone up. But we’ll see.

TN: Okay, perfect. That’s great. So we’ve covered almost everything in that survey and almost everything was wrong.

SR: I told you everything was I would take the other side of every single one of those.

TN: Perfect. Okay, let’s talk about the week ahead. We have month end and quarter end coming next week, right? So what does that mean for the week ahead? Everyone else.

TS: Can I go?

TN: Yes, you go Tracy.

TS: I don’t know. What I’m looking at for the week ahead is the last week of the month. Of the month and the quarter. Right. So we have roughly about $100 billion of US equities that need to be purchased over the next five trading sessions. We have a rebalance in the RTY. So we should see a lot of inflows, roughly 5.98 point billion of inflows into the US equity markets just because of the rebalance factor.

We should probably see outflows in the bond market and then that’s walking into a backdrop of negative dealer gamma. So we have the potential of a shot higher in the market.

TN: Sam? Sam?

SR: Yeah. I would say everything Tracy said in terms of the risk seems to be to the upside. I would also say it looks pretty scary when you walk into the end of the month in terms of the way the dollar chart looks right now.

You walk into the end of the month with a dollar chart looking like it’s ready, looking ready to gap down, and you have oil where it’s at. You could have a very interesting quarter end in terms of risk assets. You have a weaker dollar. You have a big buy on SPY, RTX, et cetera, or SPX, not SPY. You begin to put those pieces together and you begin to have a pretty risk on into the quarter that could be very interesting very quickly.

You get any positive headlines out of China in terms of lockdowns, you get any positive headlines out of Ukraine in terms of ceasefires, whatever BS they want to leak. Then all of a sudden you’re more upside. So I would say skewed to the upside through the beginning of July.

TN: Sam, you’re optimistic today. That’s amazing.

SR: I know. And contrarian.

TN: Optimistic and contrarian. I love it. Okay.

AM: Yeah, I mean, I agree mostly with Sam. I think just because the market is so thinly traded, the dollar should be chopping around probably on the downside a little bit, just for the week up until July 4 weekend, so long as the Europeans don’t come out and start saying any more Lehman things, Lehman crash things and all of a sudden dollar shoots up just because of fear factor out of the European side. But I don’t think that’s going to materialize over the next week, probably next couple of weeks.

After that, I think 30 days, we’re starting to look at possibly something that happened in the European Union. But for the week ahead.

TN: Fantastic. So the past three days carries into the next week. Fantastic.

AM: Yeah.

TN: Okay, guys, thank you very much. Thanks for your time. Thanks for all the stuff you passed along, and have a great week ahead. Thank you.

AM: All right, thanks.

TS, SR: Thank you.

Tags China, ci futures, complete intelligence, Corpus Christi, dollar, ecb, Ecuador, emerging markets, Europe, european union, Fed, Fukushima, GDP, geopolitical, German, nazi, November, October, powell second term, Qatar, rtx, Russia, spy, texas, The Week Ahead, tony nash, University of Michigan, US, us dollar, USD, week ahead, WTI, yellen, Yen

Week Ahead

The Week Ahead – 25 Apr 2022

Post author By admin
Post date April 23, 2022

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Fed Chairman Powell was out this week all but assuring a 50bp hike in May, also implying we may see a burst of quick hikes. Then everyone who said “it’s all priced in” two weeks ago panicked on Thursday and Friday. Mike Green shares what’s new here and why are we seeing the reactions now?

We’ve spoken before about Q2 earnings, expecting them to generally be weaker, partly on inflation, which every company is blaming for shortfalls.

– Snapchat missed earnings but it reported 64% revenue growth, with daily active users up 20%.

– Netflix lost subscribers. They’re now the tech cautionary tale.

– FB is falling in anticipation of an earnings shortfall next week.

– Tesla reported a 42% earnings surprise and they’re about even on week

We keep hearing about commodities getting smoked this week. What happened this week and what should we be thinking about right now? We’ve got a bunch of housing metrics out on Tuesday (Case-Shiller, etc). Do the guys expect to see an impact on house prices already or will it take a couple of months/another rate rise to have a noticeable impact?

Key themes from last week:

1. Powell’s Wrecking Ball (Dollar Wrecking Ball)

2. Tech Earnings

3. Commodities getting smoked?

Key themes for the Week Ahead

1. Housing

2. France election

3. Geopolitical lightning round

This is the 15th episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd

Mike: https://twitter.com/profplum99

Albert: https://twitter.com/amlivemon

Listen to the podcast on Spotify:

Transcript

TN: Hi and welcome to The Week Ahead. My name is Tony Nash. Today we’re with Albert Marko and Mike Green. Before we get started, I’d like to ask you to like and subscribe to our YouTube channel. Thanks for doing that. I also want to let you know our CI Futures promo ends on April 30th. This is CI Futures, about 3000 assets forecast every month for $50 a month. That promo will end on April 30th. So if you’re interested, please go to completeintel.com/promo and check it out.

So this week we’ve got some key things from the past week. First of all, Powell’s wrecking ball and rate rises and the dollar wrecking ball that comes with that very important item. Tech earnings. We’ve seen a collapse in tech equities over the past couple of days. Not a collapse, but some really interesting activity. We’re going to talk through that. And then commodities. We’ve seen commodities, heard some people say commodities are getting smoked late this week. So let’s talk through that.

So Mike, first let’s look at Fed Chair Powell is out this week, all but assuring a 50 basis point hike in May. And a lot of people think it may be stronger for a longer period of time, maybe June and July even. I hear a lot of people saying a few weeks ago, it’s all been priced in yet we’ve seen kind of some panicking markets on Thursday and Friday. So we’ve got the 10-year on screen right now. So what is new here from your perspective and why are we seeing the reactions now?

MG: So the point that I would argue on this is that we’re in a feedback loop effectively where the market tries to price the Fed’s indications the Fed is in turn responding to the market. And so it’s leading to a dynamic where the Fed is saying, well, look how interest rates are rising, particularly at the back end. Clearly, we’re behind the curve. Therefore, we need to hike more and we need to convey to the market that we’re going to hike more. The market mechanically has to respond to that because you just can’t ignore it. Right.

You have to effectively think of it in a binomial tree type framework. The Fed has told you they’re going to hike more aggressively. Therefore, you need to shift the whole system up. Right. And that feedback loop, I would argue, is what we’re kind of captured in right now. And it’s part of the reason why the market is forced to respond to it in a risk off fashion, et cetera. We just don’t know if the Fed really actually knows what the underlying signal is and how much of it is us and how much of it is their insights onto the economy.

The second thing that I would just highlight is that the Fed has put themselves into the very uncomfortable position of last year, arguing that inflation was transitory. And this has been one of these really frustrating things for those of us that actually agreed with them that it is largely transitory in inflation rate. Right. So the rate of inflation is transitory, but the price level, I don’t expect oil to go back to negative $37 a barrel. That would be absurd. Right, right. So when you talk about the transitory dynamic, it’s typically thought of as the rate. But I think the perception had broadly been the prices themselves were going to somehow come back down and not adjust to the realities of accommodating the difference.

So I think that is sitting at kind of the core of the issue is that the Fed is now in the same way they were trapped in that transitory framework that people began to increasingly malign and make fun of. Now they feel this overwhelming need to come out and tighten and show that they’re actually serious about inflation and reestablish credibility, even as it’s very clear that the economy is starting to slow. And they’re then forced into the mantra of now saying, well, we see no signs of the economy slowing. And so they’re going to have to maintain that for a period of time or they sound like fickle policymakers.

TN: Right.

MG: I think the market is understandably concerned and scared at how far they’re going to have to go to prove to us that they’re really serious.

TN: Right. And Yellen was out saying there will be no recession this year, which I mean, I hope she’s right.

MG: There’s a recession. Yeah.

TN: Exactly. So I was roasting coffee yesterday, and my coffee guy was telling me that coffee prices will stay elevated because of the buying cycle from the farms and so up and down the commodity supply chain, across, it seems, across metals, across crude, across ags. That timing has a real impact on the change in levels. The rate may not change much from here, but it seems like the level will remain elevated, as you’re saying.

MG: I think that’s right. And again, that’s why the transitory, I think, was so toxic and confusing to people because they were thinking, oh, we’re going back to $1.75 gasoline as compared to the $6 in chains that we’re currently paying in California. Right?

TN: Right.

MG: That’s very hard to accomplish under the current framework. And the coffee example is a really good one. It’s not so much the level. The adjustment to the level is painful. Once that level has been reached, all sorts of changes in relative purchasing activity can occur. Right. You can decide you’re going to roast your own beans because it’s cheaper than somebody else’s beans. You can decide that you’re not going to go to Starbucks, you’re going to do your coffee at home and put it into a travel mug to save money.

Whereas the Wall Street Journal highlighted you can reduce your consumption of beef and chicken and increase your consumption of lentils. And yet another example that just pisses people off because it feels completely disconnected from the reality that they’re in. But those are all true statements, right. Those are adjustments that people make once the level settles down. Where the real problem occurs is the uncertainty about the level.

Is it going to be 20% higher next year? Is going to be 20% lower next year? That makes it very hard for me to plan. And that’s really what we’ve experienced. And now what your feedback, what your contacts are telling you is no, prices are going to stabilize at a higher level because that’s what’s required to induce the supply response.

TN: Right.

MG: Okay. It sucks. Coffee is more expensive now, but at least it will be in the stores.

TN: Right. So going down the path of, say, your Wall Street Journal saying you need to eat lentils instead of beef. With interest rates rising, it seems like consumers would utilize more credit during that adjustment period. With rates rising, it seems like it would make things much more difficult. So there’s a double whammy on consumers. Are we seeing that impact right now?

MG: I don’t think we’re yet at the point that the higher interest rates are feeding through in a way that matters. Right. So the vast majority, something like 95% of outstanding mortgages are no longer adjustable rate. They’re fixed rate. And so that is going to be very slow to adjust. We’ll see that the marginal purchasing behavior. And we are absolutely seeing that. We’ve seen a dramatic reduction in refinancing and purchase applications. We’re starting to see traffic deteriorate. We’re starting to see new orders roll over. We’re starting to see consumer spending intentions begin to plummet.

And there’s two reasons why people can use credit cards. Right. You can use credit cards to smooth over effectively saying, hey, guess what? I’m getting paid my bonus next week. Therefore, I’m going to make the purchase now and I’m going to repay it. Or you can see people start to tap credit because they are so strained that they can’t do anything else.

And unfortunately, the evidence that I’m seeing suggests it’s the latter, that it’s the lower income households who are now taking advantage of high cost financing choices in order to sustain a level of consumption that they’re having difficulty retreating from.

If your rent goes up and you don’t want to be homeless and their coffee prices have gone up, at some point, you need to expand your purchasing capacity. And that means using credit.

TN: In basic terms, what we’ve been talking about on this show is demand destruction. The Fed is aimed at demand destruction. And that means that demand curve actually moves in, right?

MG: Yeah.

TN: So people are going to have to rein in their behaviors because we’re likely at new pricing levels for many things. And so that consumption is going to have to decline a bit to adjust to the new environment. Albert, you had a comment?

AM: Yeah, two comments, actually. The thing about the demand destruction and the supply, from the Fed’s point of view, they think that getting rid of demand involves eliminating supply. Right. So that a little bit has to do with the rates, but also what Mike said about doom loop. I mean, that’s very interesting because that’s exactly what we were talking about in multiple areas, not just for bonds, but Yellen herself, she’s had her minions go out in the bond market and just straight up lie to bondholders, saying, oh, they’ll recover, they’ll recover while everyone keeps buying, and they just keep butchering the long bond.

The 30 years just been 3.1 today or 3.5. It’s crazy. She did this in 2013 where she had this little ploy where she has preventing capital flight, leaving the United States in order to prop up the US equity markets. And that’s what we’re seeing today. And this doom loop between the Fed and the treasury, because they’re not on the same page. They’ve got different policies, different ideas of how to keep the market, and it’s causing problems.

MG: I would actually add to that and just highlight that this is, of course, the downside to not having people who actually have ever traded or negotiated a swap or done anything else along those lines in positions of decision making. You don’t want to put a fox in charge of the hen house. But the reality is it is somewhat useful in terms of understanding what’s actually transpiring. It doesn’t surprise me at all that Janet Yellen says something along the lines of, well, there’s no sign of a recession because they’re working very first order, first derivative type dynamics. It’s that second and even potentially third derivative that ultimately conveys the dynamics of what’s really happening.

And the second part is that the Fed operates under a model in which negative real interest rates, which is basically a function of inflation expectations and the current level of yield. Some people roughly approximate it with trailing inflation and current yield, which is completely insane. But at least if you’re doing it in a structural fashion, they tend to presume that the only reason why markets move is due to information.

The market has some insight, and this has been one of the huge policy innovations. And I use “innovations” over the last 20 years has been this dynamic of, okay, well, if we’re trying to figure out market expectations, let’s use market inputs. But those market inputs in turn respond to the policy makers. Right?

TN: Right.

MG: And there’s all sorts of structural features to markets. If I happen to short a pay or swap shop, for example, and my risk manager is forcing me to cover that risk, it has no economic signal to it. It’s simply a market feature that they are then trying to interpret as indicative of underlying demand. That’s just wrong.

TN: Right.

AM: On top of that, you have a political component where Yellen tied to a certain party or not just Yellen but others tied to a certain party are going to do things beneficial to that party.

I know economists and financial guys don’t like to hear that, but that’s just the reality of it.

TN: That’s the reality of national accounts. We also mentioned the dollar wrecking ball. We’ve seen over the past week, Yen devaluation or Yen depreciation. We’ve seen CNY devaluation. CNY has gone from, I think, 6.34 to 6.49, which is a dramatic deval of CNY. How much of an impact does the dollar have on those markets, particularly because we’ve heard about the dollar losing influence for the past, I don’t know, 50 years. But talk to us, Albert, what’s going on there?

AM: Like I said, Yellen wants to restrict capital flight, and a strong dollar does that. It’s killing the emerging markets. They gave Japan the go ahead to devalue the yen in order to offset anything that China does asymmetrically against the United States, because they have been. They’ve been in a little bit of a tit for tat for quite some time now.

So the dollar at 110 just absolutely annihilates emerging markets, except for the markets that are commodity based, like Canada. I’ve been in Canada. I love the Canadian economy right now. It’s strong oil based, gold based. So that’s where I’m coming from on the dollar right now.

TN: Great. Okay.

MG: I would just broadly highlight but by the way, I don’t know if you saw the CNY today, but it moved huge again today. So it’s actually now 6.50. Well, fantastic in the same way that like a root canal is fantastic. Right. But yes, it’s a wonderful technology. Nobody wants to experience it.

But just to put this in context, this is a move now that is equivalent in terms of devaluation of what we saw in August of 2015, in terms of the much-heralded… Right. And I would just highlight that I think this is an important move. I think it’s telling you that there’s all sorts of stuff that’s going on. I tend to fall into the category of terms of trade dynamics, more so than interest rates or even anything, those dynamics.

Japan allowing its currency depreciate, leading to depreciation for the Chinese currency or contributing to depreciation for the Chinese currency. They want a competitive in global export markets. Right. So there’s an element of China needing to respond and maintaining competitiveness versus a significant devaluation that’s occurred in the Japanese yen, which is basically, if you think about it from an American perspective, means I can buy 30% more of what a Japanese worker produces today than I could a year ago. Not quite exactly. Right. But somewhere in that range.

The second part of it, though, is that the terms of trade have just turned so ugly for these countries where the things that they need to import, they have incredible food insecurity, they have incredible energy insecurity, and those are the things that are rising in price. And we’re seeing no signs that those are going to retreat, whether it’s LNG that Japan now has to compete with China in Europe or from the United States and elsewhere or whether it’s wheat or rice or corn.

I believe, Albert you may know this better than I do but I believe Malaysia just announced export restrictions on palm oil, worried about their own food security. This is the way the system breaks down. And the irony of course is the US, are we going to get unlimited palm oil imports? Of course not. But can we use soybean oil or canola oil in lieu of palm oil for frying our Twinkies and our food? Of course. Right. We can do that. The US can survive almost anything from a food or energy shortage standpoint. It’s the rest of the world.

Albert referenced the emerging markets. I mean man, if you are a cash crop producing emerging market that is now struggling with issues around food and energy security, this is going to get bad. It’s really bad.

AM: It’s really bad. It’s causing political uncertainty in many regions of the world. And again use the phrase doom loop because politicians over Covid policies have created a doom loop in trade.

TN: But let me ask you and we need to wrap up this topic but I want to take this full circle because it’s fascinating. With the currency devaluation depreciation in China, Japan and the food issues could that potentially push, say, North Asia to put more pressure on Russia to wrap up the conflict so that the commodities out of Russia and Ukraine can alleviate some of this price pressure on emerging markets. Is that a possibility?

AM: It’s a possibility, but I think it’s a small possibility. Things have changed because of the Ukrainians sinking that battleship. They got bears at that point.

But Interestingly though, now that you mentioned, I just thought of it. Japan and China have always competed for the fishing rights and then sea Japan. So you could see a future. Want to say naval skirmish but a couple of boats taking some live firearounds.

TN: Sure. Yeah. Or a mistake. Right. You could have a mistake that results in something like that. Okay, let’s move on to tech. I think we can talk about this issue for hours.

AM: Yeah.

TN: Let’s move on to tech. Robert, we’ve spoken about key to earnings for a while, expecting them generally weaker, partly on inflation and other pressures. But this week we saw Snapchat miss earnings, but they reported 64% revenue growth and their active users were up 20%. So their business seems to be going well. Netflix lost subscribers and we saw them kind of as the tech cautionary tale. Facebook is falling in anticipation of their earnings for next week. On the bright side, Tesla saw a 42% earnings surprise, but their stock, after moving up a bit, really hasn’t moved much.

So on screen, we’ve got Facebook and Snapchat kind of showing their downward trajectory over the past month. So can you talk us through kind of what’s happening with tech earnings? Is that a rotation? Is tech really out of gas? What’s going on there?

AM: I believe tech is out of gas. A lot of it has to do with inflation and rates and whatnot. But I think tech earnings had gone into the stratosphere when Covid was just blazing because of the lockdown. People stayed at home, got on Snapchat, got on Facebook, got on Google and whatnot. Right.

The Tesla earnings. Those are a joke. It sounded like Tesla is the most efficient automaker in the world, which is absolutely a joke when they’re making cars intense. And it took the market up like 70 points. And then as soon as some of the better analysts started digging through the information, immediately sold off again. And then that actually triggered, I think that triggered the market to sell-off a little bit because people are worried about tech earning. I think Google’s going to miss big because their brick and mortar advertising scheme is hurting. Last month and this month it doesn’t look pretty.

But I want to take some caution here because everyone’s going to get beared up on these tech earnings as everyone’s seen the Huawei, big puts coming out there and whatnot. But we’ve seen time and again these tech earnings missed on revenue. And then the guidance is fantastic and the market rips 200 points in a week. I don’t want to be short tech at this level right now.

TN: Right. Mike, what are your thoughts?

MG: The obvious component is that we’ve got extraordinarily difficult compares for most of the tech companies. Right. So you go into a pandemic and every kid needs a computer, every kid needs a cell phone, every kid needs that. And I’m speaking to you over a microphone that was purchased during the pandemic and a computer that was purchased during the pandemic and a video camera that was purchased during the pandemic. Right. And I upgraded my software and my kids got new phones and all this sort of stuff that all occurred. Well, guess what? It’s not happening now. That’s harder.

And when I think about the reinvestment that needs to occur as we talk about going back into the office and into work, et cetera, it’s much less on the soft side. It’s much more on the simple dynamics of how do we restock a pantry at a company cafeteria. Right. Which hasn’t had to happen for a while.

TN: Right.

MG: So I am generally skeptical of it. I’m particularly concerned about the consumer side of it. One of my friends many years ago had highlighted that the emergence of cell phones as a consumer good had by and large, replace lots of other types of spending. So it reduced clothes, reduced spending on everything else. People are now tapped out on buying those phones. Right? They’re out of money and they’re using their credit in one form or another. So I’m skeptical on particularly Apple.

I agree with Albert, by the way, on Google. I think people are underestimating the importance of the bricks and mortar, and they’re also underestimating. I think this is one of the challenges for the Netflix. I’ll be 100% straight with you in terms of my household’s reaction to it. I mentioned it to my wife. She’s like, well, we’re obviously switching to the advertising supported model as soon as that becomes available because, candidly, I don’t even like watching Netflix to begin with. I could care less. If I have to watch ads and get it for $10 as compared to $20, then I would argue that this is happening broadly.

As we move back to an advertising supported model, the inventory of advertising space is about to explode at the exact same time that demand is relatively weak. So who thinks we’re going to get premium prices for advertising anymore? These models are screwy in terms of how badly they could deteriorate. If you simultaneously have a boom in advertising space at the exact same time that demand is relatively short.

TN: But lucky us, we get more campaign ads until November.

Okay, great, guys. Moving on to commodities. We saw commodities pretty much get smoked in the last half of this week. We’ve got one month history of WTI and copper up on the screen. So what happened this week, and what should we be thinking about right now with respect to commodities?

AM: I think that in terms of commodities, I think the biggest component right now is to see what happens in the Ukraine war, whether Russia stops because the Europeans and the Biden administration is using that as like the Putin price hike and whatever. But that’s what they’re blaming it all on. And a lot of people are worried about this being an extended war. I don’t think it’s going to last more than another month or two.

But for commodities, especially wheat and fertilizer, the moment that Ukraine comes back online, those things are just nosedived. And the Fed wants that to nose dive because they’re trying to kill supply in order to tackle inflation. So that’s from my perspective, there.

TN: So a lot of this at this point, you think depends on Russia, Ukraine.

AM: Yeah. That and the dollar. That and the dollar. So the dollar goes up, prices will come down.

TN: Okay. So appreciated dollar, did that hurt commodity prices this week?

AM: I think so. Go ahead, Michael.

MG: Yeah. So they’re not quite inverse. But remember, when we see prices, we’re seeing our prices, we’re not seeing the rest of the world’s prices. And exactly to the point that we were raising before with Japan and everything else on a year to day basis, as much as you may think, oil prices are up in the United States, they’re up maybe 50% in the United States. They’re up 100% if you’re in Japan. Oil prices 100% on a year to day basis.

AM: Wow. Right.

MG: I mean, that’s just an extraordinary outcome. You’re looking at these kind of underlying characteristics, and you have to say to yourself, the rest of the world is going to start to experience significant declines in aggregate demand.

Forget the supply component that Albert is highlighting. Focus much more on the demand. And when we think about commodities, developed world demand is extraordinarily efficient. We don’t throw copper on the ground. We don’t discard it into landfills. We recycle copper. Right. We recycle aluminum. We clean up the sludge off of our factory floors. That doesn’t happen in most places around the world. Right. Scrap found out in the open is still a significant fraction of aggregate supply. So we just use it more efficiently.

As things shift back here, we’re going to become more efficient at it. And I got a lot of heat earlier this week for posting a chart that said, look, I’m not seeing this commodity super cycle. I’ll say I’m not seeing this commodity super cycle. I don’t see the underlying outward shift in aggregate demand in almost any commodity that says we’re going to have truly sustained high levels of inflation and need for significant additional production other than effectively the disaggregating of supply chains. And you’ll hear things like huge copper demand because of electric vehicles. Right. That is selling human innovation so short, it’s just ridiculous.

If copper prices go higher, we’ll figure out how to use less copper wiring. That’s the history of the world.

TN: Right.

AM: That’s absolutely correct. That’s when they started using, like, gold flakes and sprays and different types of adhesive made out of whatever.

TN: But it generally takes a big demographic change to enter a commodity super-cycle or some sort of supply cut-off, right?

AM: Yeah. I can see a super-cycle within one or two commodities peaking and then coming back down and another one peaking and coming back down. But this insane super cycle that people were expecting, I don’t think it can happen. I agree with Mike.

TN: Okay, great. Let’s switch gears and look at the week ahead. Guys, we talked a little bit about housing, but we’ve got a bunch of housing metrics coming out next week with Case Shiller and a few other things. Because of rate rises, do you guys expect to see a near term impact on house prices? Are we kind of in a wait and see mode? What do you think is happening there.

AM: Politically? The Democrats want housing to come down. Right. And I think some of this bond action is meant to do that to be honest with you. I think they want houses down in the 30 year up. These prices, these housing prices are insane. It just stuns me to see some of these homes going for 150% of what they were two years ago.

And at some point the buyers are going to dry up. I mean, these cash buyers are going to dry up. And the credit now, I think in Tampa, it’s like over 6% for a 30-year mortgage. It’s going to make it even more unaffordable.

TN: But how much does that have to do with housing supply? Are we seeing more supplies coming on the market?

MG: Well, we are seeing more supply of new homes because the delays in completion means that homes that were ordered 18 months ago are finally starting to show up on the market. And that’s been one of the challenges. Unlike what we saw in 2005, 2006. This is not a function of massive amounts of new housing being built in areas that previously did not have housing.

So the character of 2004, 5, 6 was effectively converting farms and semi rural environments into subdivisions of endless numbers of homes that look identical so that people could have a home and then drive an hour to their work or an hour and a half. I mean, that was just crazy.And that was killed by the spike in oil prices that occurred with Hurricane Katrina and Ivan.

This time around, you just have a shortage of supply in terms of people willing to move. And unfortunately, the increase in interest rates, paradoxically, can exacerbate that. Right. Because I don’t want to leave my house and buy a new house because I have to enter into a new mortgage. Right. Of the mortgage. So, perversely, this could end up preventing supply from coming onto the market because when I go to look to replace my home, I can’t do it. And so it’s not clear to me that prices are going to take the hit that people are looking for.

I think at the low end, you’ll see certainly some pressure on new homes. You’ll see some pressure. But perversely, that just exacerbates the problem. Right. If new homes get hit more than existing homes, guess what? We’ll get less new homes.

TN: Okay, great. So far, it’s a very positive show, which is fantastic. End of a rough week into a rough show.

Let’s talk a minute about the French election, guys. It’s next week, what do you expect to happen in markets, say, with the Euro and French equities.

AM: Yeah, actually, we ended up buying the Euro today, looking for Macron to win reelection. Everyone that sees my Twitter feed knows I’m a conservative. Le Pen is a disaster for France, for Europe, transatlantic relations with the United States. She just can’t win and she won’t win. But the thing is, a lot of people think that she’s going to win.

So I think the Euro is going to probably pop half percent, maybe even percent, come Sunday into Monday. And then the dollar might actually come down and the market might actually rally a little bit crazy.

MG: I’m certainly sympathetic to that. I mean, the degree of sell off that we have seen, everything ranging from the yen to the Euro, et cetera, it’s hard to sustain this type of momentum. Ultimately, I’m exceptionally bearish on Europe. I’m exceptionally bearish on Japan for reasons that are largely unrelated to the immediacy of it.

I agree with Albert, and I actually would highlight something that he said that is really important for people to understand. When you describe yourself as a conservative, most people would say, okay, Marine Le Pen is a conservative. Right. Because she represents anti immigration and she represents behave more like French people. Right. But the reality is conservatism is all about let’s not break the system and try to replace it with some utopian vision. Right. Let’s try to work within the existing system to make it better.

When you enter into periods of uncertainty like what we’re experiencing, there’s a reason why the incumbent almost always wins, because people don’t want radical change in their lives. It makes it far more difficult. And so I just am not seeing any evidence that Le Pen has the chance that she’s claimed to and not that I want to join Albert on the potential tinfoil hat conspiracy standpoint, but I agree with them. I don’t think she’d be allowed to win.

TN: Okay, interesting. So a little bit of stability in Europe, which is great.

Guys, let’s have a quick geopolitical lightning round. I know there’s a lot going on in Russia, China, Ukraine, elsewhere. What’s on your mind, Albert, when you talk to your politics, what are you talking about the most?

AM: Honestly, China. The civil unrest in Shanghai, that’s actually looking like it’s spreading is kind of really concerning. For years, Xi’s been holed up in bunkers and can’t go.

You know, China, Tony. I mean, you have 1.3 billion people mad at you. You just don’t go out. Xi has this problem at the moment. So for me, it’s the civil unrest in Shanghai spreading to Guangdong and even outwards.

MG: Wait a second. So XI has 1.3 billion people mad at him? Did he say something against Bitcoin? Sorry.

AM: That would be 2.3 billion people because all of India is there too.

MG: 1.4 billion people. But yeah, exactly. You get really mad about that, as I’ve discovered.

Now, listen, I completely agree with Albert that, and this is again, part of the great irony of everything that’s been going on and I’m somewhat guilty of this myself looking at the dynamics of Russia and the moves that they were making and I think both Albert and I would still come to the conclusion says they’re going to take Ukraine and they’re going to take it in a much more violent fashion because now they’re really pissed.

TN: Yes.

MG: But the simple reality is that I think most people had described a degree of competence to Putin and Russia that has now become very clear that the authoritarian and central planning tendencies associated with that style of governance has its flaws. People are slowly waking up to this.

They’re now beginning to see this in China where it’s like well, wait a second. Maybe Xi’s not planning for the next 100 years. Maybe XI’s planning for the next two days to figure out where… without getting killed.

TN: That’s exactly it, Mike and I’ve been saying that to people for years. China does not think in centuries these guys are making it up as they go along. I’ve been inside the bureaucracy. I know it. They’re making it up as they go along.

So you hit it right on the head. They’re planning for the next two days or two months. They’re not planning for the next 200 years.

AM: Yeah. And the Chinese, they’re quite practical but it’s just too big of a country. I mean, there’s so many different regions and dialect. How do you keep something that big cohesive manner? You don’t.

TN: It’s hard. It’s a collection. It’s like the EU or four of the EU. But it’s very complex for one guy to manage. So guys, thanks very much for that. I really appreciate it and have a great weekend. Thank you very much.

AM: All right. Thanks, Tony.

MG: Thank you very much.

Tags biden, bitcoin, California, Canada, China, ci futures, cny, complete intelligence, Europe, Facebook, Fed, France, french, Google, Japan, Lng, Marine Le Pen, Netflix, North Asia, Putin, Russia, Shanghai, snapchat, tesla, tony nash, Ukraine, US, week ahead, WTI

Week Ahead

The Week Ahead – 04 Apr 2022

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Post date April 3, 2022
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Here’s a special promotion for the Week Ahead listeners: 90% off CI Futures (Complete Intelligence’s market data and forecast platform.) https://www.completeintel.com/promo

CI Futures forecasts approximately 800 assets across commodities, currencies and equity indices and a couple thousand economic variables for the top 50 economies.

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Yield curve inversion is on everybody’s mind and it only seems to be intensifying. It’s happened 4 times over the last 22 years. What does it mean, how does it impact Fed policy and how will it impact markets more broadly?

Energy prices are still a big problem and the Biden administration this week announced a very large release from the strategic petroleum reserve. Will this really bring down prices on a sustained basis? And what are some of the unintended consequences of the SPR release?

We’ve seen tech names rally pretty hard since mid-March like Alphabet and Meta. What’s happening and how long will the tech rally last?

Key themes from last week

Inverted yield curve and Fed policy
SPR release and crude market impacts
Tech’s comeback?

Key themes for the Week Ahead

Rubles for O&G. When will Europe give in?
Housing stocks and the housing market
Mixed messages of simultaneous stimulus and tightening (rate hikes with energy stimulus)

This is the 13th episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.

Complete Intelligence: https://www.completeintel.com
Intelligence Quarterly: https://intelligencequarterly.com

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Tracy: https://twitter.com/chigrl
Albert: https://twitter.com/amlivemon

Time Stamps

0:00 Start
1:00 Key themes of last week
1:29 What the yield curve means and how it impacts the Fed policy
4:50 The Fed has to break something?
6:33 Large release from SPR, will this bring down the crude prices?
8:30 Viewer question: Will Biden’s threat to US drillers produce the desired results?
12:19 Tech rally?
14:16 Key themes for the week ahead.
14:44 How long before Europe pays ruble for oil and gas?
18:52 Home builders VS real estate
21:00 What do people read from tightening, easing, and all the stimulus?

https://open.spotify.com/episode/6lq8AQvU602RQWSPWi5bYz?si=698bb7d1e4f94b23

Transcript

TN: Hi and welcome to The Week Ahead. I’m Tony Nash. I’m joined by Albert Marko, Sam Rines and Tracy Shuchart. Thanks for joining us. Before we get started, I’d like to ask you to like and subscribe to our YouTube channel. Also, want to let you know about CI Futures, our subscription product. We cover thousands of assets and economic concepts on CI Futures. Our forecasts are refreshed every weekend. You come in Monday morning and have a brand new forecast each week. Right now we’re offering a special subscription price of $50 a month. Please go to completeintel.com/promo and find out more.

So this week we had a few key themes. First is the inverted yield curve curve and Fed policy. Second is the SPR release and crude market. And the third is around tech. Is there a comeback in tech?

Sam, you’re up first. Let’s talk about the yield curve. It’s on everyone’s mind and it only seems to be intensifying. It’s happened four times over the last 22 years. So Albert and Sam, can you help us understand what does it mean? How does it impact Fed policy? Are they going to be more cautious going forward and how will it import markets more broadly?

AM: Well, Tony, concerning the inverting the yield curve, Jerome Powell doesn’t really want to do that. However, Janet Yellen does want to invert the yield curve. This is the divide that’s been throwing off the market analyst for quite a long time, quite a while now, actually, myself and I just found out and realized where the divide was. And normally in a deep quad for to take something from hedgeeye’s commentary, the only things that you can buy are Treasuries and gold. And right now Powell will be fighting a tide because of the long dated treasure is the number one thing to own in that scenario. So trying to protect stocks while hurting housing, and then you have Yellen that’s trying to protect housing. It’s quite a mess. And it’s probably something like Sam can actually detail the inverted yield curve on.

TN: So why are there are two camps just to go into that down that trail for a second?

AM: Well, it’s a policy, it’s ideology, basically. Yellen did this before in 2013, 2014, I believe. And Powell is not really an economist. He’s a lawyer. So he’s probably hearing it from his little circle of miscreants. So that’s where that’s coming from.

TN: People, whoever is listening.

AM: I’m sure they’re fine people. I’m sure they are. I think Yellen is probably correct in this instance, but we’ll see how that plays out.

TN: Okay, Sam, what do you think?

SR: Yeah, in inverted yield curve, generally, everybody’s like, hey, recession on the horizon. In reality, yeah. I mean, there’s always a recession at some point on the horizon. And what the yield curve tells you is that there’s one coming in the future. No kidding. But it’s not good for one timing, a recession period.

TN: So we’ve got the 2/10 spread on the screen right now. So can you tell us what does that mean and how much importance does that hold with that two and ten yield spread going negative?

SR: I mean, it’s something to pay attention to. I mean, the market is telling you something with that. There is some signal, even if there’s noise in there as well, that the Fed is going to go very, very quickly and is likely to break housing or break something else or break housing and something else. And that’s going to probably cause inflation to come back down. Right.

The market does not believe that or at least fixed income market does not believe that inflation is going to be a problem in ten years, does not believe that the Fed is going to be able to hold interest rates very high for very long. And that’s why you get the 2/10s inverted. Right. The Fed is going to go above what the “natural rate or the stall rate” is for the US economy.

TN: Right. So we’ve been saying for several weeks the demand destruction is the only way that the Fed is going to solve supply side inflation. And the last couple of weeks you’ve talked about the Fed breaking something at this point, the Fed almost has to break something. Right? I mean, Volker broke something in the early 80s. Right. Something has to be broken.

SR: Yes. Something has to be broken or you’re not going to solve the inflation issue. And you have to do it. You have to do it in a pretty rapid manner of tightening in order to get the inflation levels that we have now back to something somewhat reasonable in a time frame that is adequate. But again, it doesn’t tell you what’s going to break. We talked about it last week. Housing looks sick. Housing equities look sick. It does not look great, but it doesn’t tell you much about the broader market. Right. It’s a lot of noise. You can say that it’s bad for equities, but generally it takes a while for it to be bad for equities.

TN: Okay, great. Now, JPMorgan put out a note this week. Everyone’s putting out notes about when rates are going to rise. They said 50 in May 50 in June. Are you thinking that or is that kind of on the edge of aggressive?

SR: I mean, it’s aggressive, but the Fed has very little choice but to be aggressive in this instance or it’s going to lose credibility further. And that’s an issue for it. Right. It doesn’t want to lose that little bit of credibility it has left to raising rates too slowly in an environment where it’s getting the green light to do so from markets. Markets have it priced in. Why not do it?

TN: Yeah. If someone said in January that we’d be raising 50 in May, 50 in June, I think you’d be laughed at. But now it’s taken seriously. So it’s just really interesting to see the iteration of that expectations.

Okay. Speaking of inflation, let’s move on to energy prices. Tracy, obviously, there’s still a big problem. And this week, the Biden administration announced a very large release from the Strategic Petroleum Reserve. You’ve been all over this, including the Tweet you sent out on Thursday, which is on our screen talking about logistical issues.

So the main question I think for most people is will this bring down oil prices on a sustainable basis? So can you talk to us about that and some of the unintended consequences of the SPR release?

TS: Yeah, absolutely. It’s not enough to keep oil prices sustainably lower. Right. It doesn’t fix the structural supply deficit that we have years to come. Also, this slows shale growth because it disincentivizes shale producers from drilling more, which actually needs to be done and also creates potential logistical bottlenecks because we’ve never released this much before. That could cause congestion on the Gulf Coast. And that Tweet is up I think, talking about the bottlenecks there.

And then there’s another issue that has not been discussed yet broadly. And that’s because the SPR is aging. Right. And so we’ve had releases before where we’ve seen degradation in oil. And in 2015, they approved the $2 billion upgrade to the SPR, which is not going to be done until 2025. That said, what they did is they did everything except for the distribution centers. So what will happen is we need to see if we can actually get a million barrels per day pushed through. So there’s a lot of obstacles here.

TN: So it’s a sentimental kind of downside for oil right now. Nothing’s really released yet. And it doesn’t seem all that feasible that it’ll come out soon. Right. So supply chain issues like we’re seeing everywhere else.

So we had a viewer question from @VandanaHari_SG. It says, to what extent will Biden’s threat to us drillers to drill or get off the lease, produce desired results? You mentioned Frackers earlier. Will we see much movement there?

TS: No. Biden did call for Congress to make this decision. Personally, I do not believe that this will actually get passed by Congress. That said, again, this disincentivizes oil companies from producing more because it’s not that easy to just turn on wells. They’re facing labor shortages. They’re facing supply chain shortages. It’s not that easy to do that.

So if you tell them we’re going to tax you on this, then if they abandon those wells, then it’s going to take that much longer to get them back online when they are ready to. So all in all, it’s a horrible idea. Again, I do not see Congress passing this whatsoever.

TN: It’s complicated. And I think that’s the thing that we live in a world that likes to simplify things a lot. Right. And we like to say we’re going to do X, we’re going to do Y, we’re going to do Z. And the implementation of this stuff seems to be a lot more complicated Than we hear from, say, these non experts that talk to us all day long on TV or social media.

TS: Exactly. I mean…

TN: We can’t just wave a wand fixed supply.

TS: And turn on oil wells. I mean, regardless, we run through our DUC supply. Right. And that’s why we’re seeing slower oil production. The monthly EIA monthly just came out yesterday. It was 11.37 million barrels instead of 11.6 million that they were estimating in the weekly. And so what happens is that you’re pulling down DUC wells, which are the ones that you can get up easily, and then you’re putting all these restraints on oil companies and threatening them with taxes and things of that nature.

To get a well online from start to finish is six to twelve months. People don’t realize it’s not let’s snap our fingers and tomorrow we’re spreading oil.

TN: It’s not exactly a nudge. Right? Remember, under the Obama administration, they really focused on condomin and the nudge and all that stuff. This is kind of the opposite of that. It’s like the bludgeon.

TN: Yeah, exactly.

TS: Doing what they want. Right. Sorry. Go ahead.

AM: No, this is just political rhetoric. I mean, they’re better off just jumping into the oil futures market and trying to drive it down. This is just talk by the Biden administration. There’s really no substance to it.

TN: Can they jump into the futures market and short it and drive the price down?

AM: Who says they haven’t? Okay. You’re looking at 127 price and all of a sudden it’s down in the 90s. Is this crypto crude? What are we doing here?

TN: Okay, that’s a good point. All right.

SR: Just one last point to that. I know Tracy actually think Tracy tweeted this out a couple of weeks ago. The latest Dallas Fed survey of oil companies made it pretty clear that a lot of them at no, they don’t care where the prices. They’re not increasing their output. They put that on paper and put that in the survey. I think that’s worth remembering is that this is a less price sensitive reaction than people are going to give credit for.

TS: 100%.

AM: Yes.

TN: Okay, great, guys. That’s fantastic. Let’s move on to equities. Albert, we’ve seen tech stocks rallied pretty hard for the last couple of weeks since about March 14th. We’ve got chart for Alphabet and Facebook on the screen right now. Sorry. Meta on the screen right now. What’s happening to tech? What’s happened over the last couple of weeks and how long do you expect them to rally?

AM: Well, they’ve used tech, maybe a dozen names to rally the market. This is well known. I mean, if you look at those names that you have listed along with AMD, Nvidia and Adobe, they can be up to 30, 40% of the call action on a given day. It’s kind of silly, but honestly, it’s like this is a zero rate economy at the moment. So as our rates go up. Yeah. So as our rates go up, I don’t see how tech is going to rally much further.

TN: Okay, Go ahead.

TS: I’ll just throw in that just because BAMO came out with their weekly flows that we’ve had, tech market was $3.1 billion, which is the highest in two months.

TN: Okay. Interesting. All right. So if we go with the note that came out that in May and June will see 50 basis point rises, and you’re saying tech can’t continue to rally into higher interest rates, are you saying we’re looking at that type of horizon for tech to not be as attractive?

AM: Yeah, unless they reverse course come June or July. I don’t see how tech can really rally to what their all time highs were a couple of months. I don’t see it.

TN: Sam, does that make sense to you?

SR: It does make sense to me. I think the only saving grace for tech thus far has been that the long end of the curve hasn’t done much, and it actually looks a little sick at the moment in terms of yield. And that’s been a little bit of a semi tailwind, at least prop them up.

TN: Great. Okay, perfect. Let’s look at the week ahead. Some things we have for the week ahead are rubles for oil and gas. When will Europe give in? Housing stocks and the housing market? Sam mentioned that earlier. We’ll dive a little deeper into that and then the mixed messages around simultaneous stimulus and tightening, which I think is confusing some people.

So first, let’s dive into rubles for oil and gas. I did a quick Twitter survey earlier, which is up on your screen asking people how long before Europe caves and pays for oil and gas and rubles. Something like 70% of people think they’ll do that within two weeks. It’s just a Twitter survey. Some of those guys are experts. Some of those aren’t. Tracy, what do you think? Is that realistic?

TS: Putin actually came out today and said this is the plan. There is no backing out. However, it doesn’t include what you pretty much already bought. That means. So deliveries until most delivery until April 15, and then really in May 1 is where that really starts, where Europe will really have to start paying in rubles.

TN: So May 1 is when you think the rubles?

TS: May 1 is really when the bulk of this situation will come in hand because it’s not for what has already been ordered. Right.

TN: Okay.

TS: Does that make sense?

TN: You think we could see a trickle in mid April?

TS: Yeah, exactly. But I think that they’re going to have to do that. They really have no other choice unless they kind of want to plunge into the dark ages. Right there’s just not the backup plan is forming, but it’s just not there yet. So I think that they will concede even though they have a little bit of a time. They have 15 to 30 days to really. But you can’t move that fast. It’s not that easy to change suppliers that quickly.

TN: But we’ve talked about this a little bit. But what happens to say industrial output? German manufacturing if they decide not to do this? To be honest, it sounds like a pretty trivial thing to me to pay in another currency. There is a transaction cost to it. But if you’ve got a major economy, it doesn’t sound like something that you can really stand by insisting to pay in dollars. So what happens to German manufacturing? What happens to industrial cost Europe.

TS: It’ll actually plummet. I mean, BASF already came out and said we’re going to have to cut production if this happens. The German plan is basically to shut down manufacturing and to give residential the leeway if they have to start rationing. So that means if manufacturing starts shutting down in Europe, you’re in recession territory immediately.

AM: Yeah. They’ll find a way. They’ll find some special vehicle to sort this out. They got a little bit of time, like Tracy said, they got about two months really to sort this out. And anyways, the weather is starting to get warmer, so the less gas will be used. Anyway, I don’t see this to be really of a big problem. It’s just a lot of noise and a little bit of leverage from Russia on the sanctions that they are getting hit by well.

TN: But conceivably because of the embargoes on some of the banks in Russia, it could be a real issue with having funds rubles in Russian banks. No?

AM: I don’t think so. They can go between the Swiss, London will do it. It’s the same thing as the Yuan, renminbi, it’s like when they trade it for oil, the Saudis sell it in renminbi and goes to London, gets converted instantly and it’s dollars almost immediately to the seller. So I don’t think it’s going to be a problem.

TS: I 100% agree that the currency doesn’t really matter because it’s still factored into what is the dollar value. Right. It doesn’t really matter or any in Europe’s case, what is Euro per megawatt hour?

Regardless, it’s not really the currency that matters so much. The fact is the currency is helping. What Russia is trying to do is that if you have to sell euros to buy rubles, that keeps the currency afloat.

TN: Right. Which we’ve seen it surge back this week to pre war levels. Okay, great. Let’s move on to homes and home builders. Sam, you mentioned the housing market and housing stocks earlier, and we’ve got on the screen a chart about US real estate and home builders and the divergence between those. And they’re usually pretty correlated. Can you talk us through your expectations for real estate relative to where homebuilders are trading right now?

SR: They’ll look like homebuilders pretty quickly here. It’s what the Fed is basically able to do in terms of the economy quickly. Right. If you’re going to tighten rates by two and a half percent in a year, plus quantitative tightening, that’s what you’re going to hit. You’re going to hit home builders and real estate. That’s generally what you’re going to hit and you’re going to hit it fast.

In particular, the shorter duration type real estate that’s benefited the most from zero rates. If the long end of the curve stays somewhat subdued, you’re probably fine if you have longer duration type retail or that type of lease. But the shorter term duration real estate type plays are going to be in some trouble here.

TN: Okay. And so you say it’s going to happen pretty quickly. Last week you said it’s going to happen in Q2. When I first heard that, I was a little bit surprised. But just seeing what’s happened over the past week, it’s been really surprising to me that things have moved so quickly. So I think you’re right. I’m really interested to see that happen.

Now. You also mentioned QT. So let’s talk a little bit about kind of the tightening and easing, the simultaneous tightening and easing that we have going on. And how do we expect that to move over the next week? So, Sam, you’ve been pretty insistent that QT is going to start in May, is that right?

SR: Oh, yes. Little doubt.

TN: Definitely going to start in May. Now we’ve got countries and States giving energy stimulus and other things happening. I wouldn’t be surprised if different forms of stimulus come out. So how does it work where we have really fairly significant stimulus coming out as we’re tightening? What do people read from that?

SR: I would say confusion. Right. If you’re trying to actually tackle if you’re trying to tackle inflation with monetary policy, that really has to break something in order to get it under control, and yet you’re giving people more leeway to not have something break more money in their pockets. It’s counterproductive. Right. So you begin to either have to tighten more or tighten quicker or both to get it under control or you have to stop it with the fence full fiscal.

TN: What are you hearing about that Albert out of DC?

AM: I was on this program. When was it? About a year ago, talking about tapering with Andreas, and I was against tapering. I never think it was going to happen, but because the fact that we just keep going on QE, how do you tighten when you have QE and the Fed balance sheet is still expanding by 100 billion plus a week. I mean, that’s not.

This is why there’s so much confusion in the market. Like Sam was saying, it’s just you talk about tightening. Meanwhile, you secretly spend $160 billion to pump the market. So which one is it? As an analyst, how do you even assess what you’re going to do over the next 30 days when the Fed’s confused? The Fed and Treasury is confused.

TN: So can we have that where we’re say doing tightening but helping equity markets continue to rise?

TS: I mean, is that just weird? Of course it does. It is weird. You can’t have monetary policy going head to head with fiscal policy. Right. So you’re having fiscal policy loosening. At least let’s look at the energy markets right now. You can’t have all of this stimulus and it’s not just from the United States. It’s from across the world is doing this and we’re going to see more of this every week of new countries come out and save money.

TN: Not in Japan. Japan is easing across the board.

TS: Yeah.

TN: Everyone else.

TS: True. But of course, I agree completely with the Sam said it’s confusion in the markets because you are literally having central banks butting heads with governments right now.

AM: Yeah. And that’s something people don’t really pay attention to. It’s not simply the US federal reserve with the US economy, but it’s the federal reserve with all of anglesphere. They can have the Canadians or the UK do tightening while we do expansion and vice versa. They can do it unending. It’s unbelievable.

TN: So when do we know the direction? When do we know whether we’re tightening or easing? Do we come to a point like is May the end point for easing?

AM: I don’t know, Tony. I can’t really tell you that because they can say that they’re doing that and then we find out two months later that they didn’t do it and they can use all sorts of weird little gimmicks that they have control over.

TN: Okay, Sam, what do you think?

SR: I think the comment about the Anglosphere was really interesting because it’s 100% true, right. If you look at a lot of the EMS, they’ve been talking lightning for a year or at least nine months. So I think that’s the really intriguing kind of comment for me is the US is probably so late to the game that EM is going to be easing by the time the Fed actually accomplishes any sort of tightening.

TS: They’ll have to, they will have to.

SR: Which sets something interesting up, by the way.

TN: Sorry.

SR: Which sets something interesting up for when that happens. But that’s down the road.

TN: It really does. Yeah. Remember synchronized easing and synchronized tightening a decade ago? I just feel we have so many mixed messages out there that it’s no wonder we have the volatility that we have in market. Okay. Thanks very much for this. I really appreciate it. Have a great week ahead.

AM: Thanks, son.

TS: Thanks.

SR: Thank you.

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Week Ahead

The Week Ahead – 28 Mar 2022

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Post date March 26, 2022
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We’ve seen so much about oil for rubles, gas for bitcoin, etc this week. Does it represent a fundamental shift for energy markets? And is the dollar dead? The yen fell pretty hard versus the dollar this week. Why is that happening, especially if the dollar is dead? Bonds spike pretty hard this week, especially the 5-year. What’s going on there and what does it mean?

Key themes from last week:

Oil for rubles (death of the Dollar?)
Rapidly depreciating JPY
Hawkish Fed and the soaring 5-year

Key themes for The Week Ahead:

New stimulus coming to help pay for energy. Inflationary?
How hawkish can the Fed go?
What’s ahead for equity markets?

This is the 12th episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.

Listen on Spotify:

https://open.spotify.com/episode/0twcBeGGELUrzdyMS0o37U?si=4dab69b94c3e4ec9

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Tracy: https://twitter.com/chigrl
Albert: https://twitter.com/amlivemon

Time Stamps

0:00 Start
0:34 CI Futures
1:22 Key themes this week
1:48 Oil for rubles (death of the Dollar?)
3:15 Acceptance of cryptocurrency?
5:34 Petrodollar Petroyuan?
7:32 Rapidly depreciating JPY
10:12 Hawkish Fed and the soaring 5-year
11:58 Housing is done?
13:10 Stimulus for energy
15:53 How hawkish can the Fed go?
17:34 What’s ahead for equity markets?

Transcript

TN: Hi, everyone, and welcome to The Week Ahead. My name is Tony Nash. I’m here with Albert Marko, Sam Rines, and Tracy Shuchart. Before we get started, please, if you can like and subscribe to our YouTube channel, we would really appreciate it.

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Okay, this week we had a couple of key themes. The first is oil for rubles and somewhat cynically, the death of the dollar. Next is the rapidly depreciating Japanese yen, which is somewhat related to the first. But it’s a big, big story, at least in Asia. We also have the hawkish Fed and the soaring five-year bond. So let’s just jump right into it. Tracy, we’ve seen so much about oil for rubles and Bitcoin and other things over the past week. Can you walk us through it? And is this a fundamental shift in energy markets? Is it desperation on Russia’s behalf? Is the dollar dead? Can you just walk us through those?

TS: All right, so no, the dollar is not dead. First, what people have to realize is that there’s a difference. Oil is still priced in USD. It doesn’t matter the currency that you choose to trade in because you see, in markets, local markets trade gasoline in all currencies. Different partners have traded oil in different currencies. But what it comes down to is it doesn’t matter because oil is still priced in dollars. And even if you trade it in, say, the ruble or the yuan, those are all pegged to the dollar. Right. And so you have to take dollar pricing, transfer it to that currency. And so it really doesn’t matter.

And the currency is used to price oil needs three main factors, liquidity, relative stability, and global acceptability. And right now, USD is the only one that possesses all three characteristics.

TN: Okay, so two different questions here. One is on the acceptance of cryptocurrency. Okay. I think they specifically said Bitcoin. Is that real? Is that happening? And second, if that is happening and maybe, Albert, you can comment on this a little bit, too. Is that simply a way to get the PLA in China to spend their cryptocurrency to fuel their army for cheap? Is that possibly what’s happening there?

TS: It could be. Russia came out and said, we’ll accept Bitcoin from friendly countries. Mostly, they were referring to Hungary and to China. Right. And I don’t think that is a replacement for USD no matter what because not every country except for perhaps China really accepts or El Salvador really accepts Bitcoin or would actually trade in Bitcoin. Right.

TN: In Venezuela, by the way. I think. Right. So on a sovereign basis. Okay. So Sam and Albert, do you guys have anything on there in terms of Bitcoin traded for energy? Do you have any observations there?

AM: No, this is a little bit of… This is even a serious conversation they’re having? With El Salvador going to be like the global hub for Russian oil now because they can use Bitcoin?

TN: That would be really interesting.

AM: But this is just silly talk. Every time there’s some kind of problem geopolitically and they start talking about gold for oil or wine or whatever you want to throw out, they start talking about the US dollar dying and whatnot.

I mean, like Tracy, I don’t want to reiterate what Tracy said, but her three points were correct. On top of that, we’re the only global superpower.

TN: Okay.

AM: That’s it.

SR: Yeah. My two cent is whatever on Bitcoin for a while.

TN: Right.

SR: Cool.

TN: I think that all makes sense now since we’re here because we’re already here because we all hear about the death of the petrodollar and the rise of the petroyuan and all this stuff. So can we go there a little bit? Does this mean that the petrodollar is dead? I know that what you said earlier is all oil is priced in dollars. So that would seem to be at odds with the death of the petrodollar.

AM: Well, Tony, in my perspective, the petrodollar is a relic of the 1970s. Right. Okay. Today it’s the Euro dollar. It’s not the petrodollar that makes the American economy run like God on Earth at the moment. It’s the Euro dollar. Forget about Petro dollar. Right. Because it’s not simply just oil that’s priced in it in dollars. It’s every single piece of commodity globally that’s priced in dollars.

TN: And Albert, just for viewers who may not understand what a Euro dollar is, can you quickly help them understand what a Euro dollar is?

AM: They’re just dollars deposited in overseas banks outside the United States system. That’s all it is.

TN: Okay with that. Very good.

SR: And the global economy runs on them. Full stop.

AM: It’s the blood of the global economy.

TN: So the death of the petrodollar, rise of the petroyuan and all that stuff, we can kind of brush that aside. Is that fair?

TS: Yeah. I mean, even if you look at say, you know, China started their own Yuan contract rights, oil contract and Yuan futures contract. But that still pegged to the price of the Dubai contracts. Right. That are priced in dollars.

TN: Let’s be clear, the CNY and crude are both relative to dollars. Right?

TS: Right.

TN: You have two things that are relative to dollars trying to circumvent dollars to buy that thing. The whole thing is silly.

TS: Exactly.

AM: Yeah, of course. Because Tony, the thing is, if China decides to sell all their dollars and all their trade or whatever, everything they’ve got, they risk hyperinflation. What happens to the Renminbi and then what happens in the world? Contracts trying to get priced right.

TN: Exactly. It’s a good point. Okay. This is a great discussion.

Now, Albert, while we’re on currencies, The Japanese yuan fell pretty hard versus the dollar this week. Do you mind talking through that a little bit and helping us understand what’s going on there?

AM: Yeah, I got a real simple explanation. The Federal Reserve most likely green light in Japan To devalue their yen to be able to show up the manufacturing sector in case China decides to get into a bigger global geopolitical spat with the United States. Simple as that.

TN: Great. Okay. So that’s good. This is really good. And I want people to understand that currencies are very relevant to geopolitics or the other way around. Right. Whenever you see currency movements, there’s typically a geopolitical connection there.

AM: Of course. And on top of that, if it was any other time and they started to devalue the currency like this, the Federal Reserve where the President would start calling the currency manipulators. And there’d be page headlines on the financial times.

TN: Right.

AM: And because that didn’t happen, It’s an automatic signal to me that this is what’s happening at the moment. Right.

What’s also interesting to me, Albert, is we’ve seen last week we saw Japan approach the Saudis and the Emiratis about oil contracts. We saw Japan call. There’s a meeting in Japan next week, I think, with China. So Japan is becoming this kind of foreign policy arm, whether we want to admit it or not, they’re kind of becoming foreign policy arm for the US. Because the US is not well respected right now. Is that fair to say?

AM: It’s more than fair to say, I believe Biden’s conference with South Asian leaders was just canceled on top of everything else.

TS: Sorry. And we saw this week Japan and India just signed, like, a $42 billion trade deal. So it kind of seems like they’re smoothing over the rough edges because the United States kind of came after India a little bit earlier about two weeks ago.

TN: Yeah, that’s a good call, Tracy. I think Japan and India have had a long, positive relationship. It’s especially intensified over the past, say, seven or eight years as China has tried to invest in India and the Japanese have kind of countered them and giving the Indians very favorable terms for investment and for loans. And so this is kind of a second part of that investment that was, I think, announced in, say, 2014 or 2015, something like that. And again, as we talked about it’s, Japan intervening to help the US out and obviously help Japan out at the same time. Thanks for that.

Now, Sam. We saw bonds spike pretty hard this week, especially the five year. I’ve got a Trading View source up there on the five year up on the screen right now. So can you walk us through what’s happening with US bonds right now, especially the five year?

SR: Sure. I mean, it’s pretty straightforward. The Fed is getting very hawkish and the market is adopting it rather quickly. And I don’t know how forcefully to say this. The current assumption coming from city is four straight 50 basis point hikes and then ending the year with just a couple of 25. That is a pretty incredibly fast off zero move time, some quantitative tightening, and you’re somewhere around three and a half percent to 4% worth of tightening in a year. That’s a pretty fast move.

So the two year to five years reflecting that the Fed is moving very quickly, you’re likely having the long end of the curve is lagging a little bit. You saw flattening, not steepening this week. The long end of the curve is telling you that the terminal rate may, in fact, actually be at least somewhat sticky around two and a half and might actually be moving a little bit higher. And that terminal rate is really important because that is how high the Fed can go and then stay there. It is also how fast the Fed can get there and how much above it the Fed is willing to go. So I think there’s a lot of things that happened on the curve this week.

TN: Okay. Albert, what’s in on those? Yes, go ahead, Albert.

AM: Oh, I’ve heard whispers that the long bond is going to 2.8% and maybe even 3%. That’s what the whispers have been telling me about that, which is going to absolutely devastate housing.

TN: But that was my actual idea.

SR: Oh, yeah. Housing is done. I mean, you saw pending home sales were supposed to be up a point and down 4%. That’s the first signal. The next signal will be when lumber goes back to $300.

TN: Okay. It seems to me you’re saying by say Q3 of this year we’re going to see real downside in the housing market. Is that fair to say?

SR: Oh, in Q2, you’re going to see real downside in the housing market. Yeah.

TN: Wow.

SR: Pending sales are, I think, one of the most important indicators of how the housing market is going. Right. It’s a semi forward looking indicator. If you begin to see a whole bunch of these homes in the ground stay as homes that are not being built. Right. So if you begin to see just a bunch of pads out there, it’s going to become a significant problem considering a lot of people have already bought the materials to build it off. And you’re going to begin to have some really interesting spirals that go back into some of the commodity markets that have been on fire on the housing front.

TN: Wow. Okay. That’s a big call. I love this discussion. Okay, good. Okay. So let’s move on to the week ahead. Tracy, we’ve had some stimulus announced to help pay for energy. Can you help us understand? Do you expect we’ve seen California and some other things come out? Are more States going to do this or more countries going to do this, and what does that do to the inflation picture?

TS: Well, absolutely. We saw California, Delaware, Germany, Italy talking about it. Japan already. They’re coming out of the woodwork right now. There’s actually too many to list. It’s just that we’re just now this week just starting to see the US kind of joining this on a state to state basis. The problem is that this is not going to help inflation whatsoever. You’re literally creating more demand and we still do not have the supply online. So all of these policies are going to have the opposite of the intended effect that they are doing. Right. It’s just more stimulus in the market.

TN: Do we think there’s going to be some federal energy stimulus coming?

TS: They’ve talked about different options. I mean, really, the only thing that they could do right now is get rid of the federal excise tax, but that’s only really a few cents. And they kind of don’t want to do that because that goes towards repairing roads, et cetera. That doesn’t fit into their plan that they just passed back in the fall. Right. We had infrastructure plan, so they need to pay for that. That’s already passed. So they probably won’t do that.

The other options that they have that they’re weighing are more SPR release, which is ridiculous at this point because they could release it all and it would still not have a long lasting effect on the market. And that’s our national security. It’s a national security issue. And we’re experiencing all these geopolitical events right now. We have bombs in Saudi Arabia. We’ve got Russia, Ukraine. So I think that’s like a poor move altogether.

TN: So if more States are going to come in, is it suspects like Massachusetts, New York, Illinois, those types of places?

TS: Yes.

TN: Okay. So all inflationary, it’s going in the wrong direction.

TS: It’s going to create demand, which is going to drive oil prices higher because we still don’t have the supply on the market.

TN: Okay. Wow. Thanks for that. Sam. As we look forward, you mentioned a little bit about how hawkish the Fed would be. But what are you looking at say in the bond market for the next week or so? Do we expect more activity there, or do you think we’re kind of stabilizing for now?

SR: We’re going into month end. So I would doubt that we’re going to stabilize in any meaningful way as portfolios either head towards rebalancing or begin to rebalance into quarter end. So I don’t think you’re going to see stabilization. And I think some of the signals might be a little suspect. But I do think back to the housing front. I’m going to be watching how housing stocks react, how the dialogue there really reacts, probably watching lumber very closely, a fairly good indicator of how tight things are or aren’t on the housing front.

And then paying a little bit of attention to what the market is telling us about that terminal rate. If the terminal rate keeps moving higher, to Albert’s point, that’s going to be a big problem for housing, but it’s going to be a big problem for a number of things as we begin to kind of spiral through, what the consequences of that are. It will be for the first time in a very long time.

TN: Okay. So it’s interesting. We have, say, energy commodities rising. We have, say, housing related commodities potentially falling, and we have food commodities rising. Right. It seems like something’s off. Some of it’s shortages based, and some of it is really demand push based. So energy stuff seems to be stimulus based or potentially so some interesting divergence in some of those sectors.

Okay. And then, Albert, what’s ahead for equity markets? We’ve seen equity markets continue to push higher. How much further can they go?

AM: Last week they eliminated, I think, up to about $9 trillion inputs, short squeeze, VIX crush. I mean, they went all out these last two weeks. It’s absolutely stunning. From my calculations, I think they expanded the balance sheet another $150 billion. Forget about this tapering talk. There’s no tapering. They just keep on going. How high can they go? That’s anybody’s guess right now. I think we’re like 6% off all time highs. On no news.

TN: So potentially another 6% higher?

AM: Honestly, I know that there’s hedge funds waiting, salivating at 4650. Just salivating to short it there. So I don’t think they can even get close to that, to be honest with you. So I don’t know, maybe 4590 early in the week before they start coming down.

TN: Okay. Interesting. So you think early next week we’ll see a change in direction?

AM: Yeah, we’re going to have to this has been an epic run, like I said, 90% short squeeze, 10% fixed crush. You don’t see this very often. Okay, Sam, what do you think, Sam? Similar?

SR: On equities, I like going into the rip higher. I’m kind of with Albert, but a little less bearish. I think you chop sideways from here looking for a catalyst in either direction. Bonds ripping higher today, yields ripping higher today. Bond prices plummeting. That I thought was going to be a catalyst for equities to move lower. It wasn’t. That kind of gives me a little bit of pause on being too bearish here, but it’s hard for me to get bullish.

TN: Okay.

TS: What’s interesting? I’ll just throw in like, Bama, weekly flows. We actually saw an outflow from equities for the first time in weeks. It wasn’t a lot 1.9 billion. But that says to me people are getting a little nervous up here. Profit taking, as they say on CNBC.

TN: All right, guys. Hey, thank you very much. Really appreciate the insight. Have a great week ahead.

AM, TS: Thanks.

SR: You too, Tony.

TN: Fabulous. Look. I’m married. I’m a man. I don’t notice anything. I noticed the other guys laughed at that. Uncomfortably. That’s great. Okay. I’m just going to start that over, guys. And we’re going to end it.

Week Ahead

The Week Ahead – 14 Mar 2022

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Post date March 12, 2022
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This week, we saw commodities skyrocket then drop off. We saw crude oil hit levels not seen since 2008, with gasoline and home heating prices on everyone’s minds. The nickel market broke the LME. Chinese tech and real estate bloodbath. And – despite all of this – Janet Yellen assured us there will be no recession in the US. Quite a week.

As we said last week:

– Tracy called for commodity price volatility – across sectors

– Downside bias in equities with high volatility. Albert predicted 4200-4250 and pretty much nailed it.

– Sam said a Fed rate rise would become boring and talk of QT would disappear.

This episode we talked about mostly the energy commodities with the continuing Russia-Ukraine conflict. Can the US use other alternatives like the West African oil to replace Russian oil? What are the politics around Venezuelan oil and why is it the same as getting Russian oil?How about uranium — and can the US produce it and will the conflict affect rare earths? Is this war the reason for the US’s inflation? How will inflation actually play with voters in this year’s US election? Lastly, what’s happening in Chinese tech and real estate and why there’s a bloodbath and for how long will this continue?

This is the tenth episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.

For those who want to listen on Spotify:

https://open.spotify.com/episode/35aHRd7oVfj7zPvgZjyQXg?si=d74bba8f8d094e29

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl

Transcript

TN: Hi, everyone, and welcome to The Week Ahead. My name is Tony Nash. I’m joined by Tracy Shuchart, Albert Marko, and Sam Rines. Before we get started, I appreciate if you could like and subscribe to our YouTube channel. And also please know that we have a special offer for Week Ahead viewers for CI Futures, which is our market data and forecast platform. CI Futures has about 800 assets across commodities, currencies and equity indices and a couple thousand economic variables. We track our error. We have very low error rates. So we’re offering CI Futures to Week Ahead viewers at a $50 a month promotion. You can see the URL right now. It’s completeintel.com/weekaheadpromo. That’s a 90% off of our usual price. So thanks for that.

So these week, guys, we saw commodities skyrocket and then drop off. We saw crude oil hit levels not seen since 2008. With gasoline and home heating prices really on everyone’s minds. The nickel market broke the LME, Chinese tech and real estate. We saw a blood bath there. And despite all of this, Janet yelling assured of us that there will be no recession in the US. So it was quite a week.

So let’s look at last week. Tracy called for commodity price volatility across sectors. So it wasn’t just an oil call, it was across sectors. And we saw that in spades. We talked about a downside bias in equities and high volatility. Albert predicted a 4242 50 range, and he pretty much nailed that. And then Sam said that a Fed rate rise would become pretty boring and talk of QT would kind of disappear. And we’ve really seen that happen over the past week. So, well done, guys. I think we need to really focus on inflation this week. Inflation and quantity prices are on everyone’s mind. Energy is the first kind of priority, but it’s really come across, like we said, nickel and other things.

So, Tracy, let’s start there. We have a viewer question from At Anton Fernandez, Russian oil, if you don’t mind helping us understand the environment for Russian oil and what’s happening there and some of the alternatives, which we’ve covered a little bit before, but also West Africa. Is West Africa viable within that? So if you don’t mind talking to us a little bit about what’s happening in the crude market and also help us with a little bit of understanding of the context of West Africa.

TS: Yeah. So if we look at the crude market in general, what we have been seeing, we’ve seen sanctions from Canada, which is basically political. They haven’t bought anything since 2019. We also saw Australia sanctioned oil, but they had only bought a million barrels over the last year. It’s nothing. The US only 600,000 bpd. That is nothing. And UK is going to take a year to get off oil because it’s 11% of their imports as opposed to 2% of our imports. That said, what we are seeing in this market is a lot of self sanctioning. Right.

So we’re saying we have nine Afromax Russian oil tankers basically sitting aisle because they can’t get insurance and nobody wants to pick up oil right from them. Actually, what is most surprising right now, I have to say, is that looking at Asian buyers, everybody thought that Asian buyers because it would be offered at such a discount, they would be buying this stuff up like crazy. But there was just an auction for SoKo, which is a very popular grade with South Korea, China, Singapore and Hawaii, and there was literally zero bids.

TN: Really? Wow.

TS: The next auction that we need to be looking for is ESPO, which is the most popular grade for China refiners. But if we see a zero bid there, that would be indicative of saying that we’re taking a lot of brush and barrels.

TN: Chinese we’re not seeing any interest there, at least so far.

TS: Right. Which is quite incredible because the Chinese have always decided to be apolitical. Right. And they don’t recognize Unilateral sanctions and they have stressed that. So whatever sanctions that the west has, China says we don’t care about that. We saw that with Iran as well.

TN: Right.

TS: But it’s pretty incredible to see this particular auction go at zero bid. Right. In regards to looking at West Africa, I’ve been talking about this since 2020. Niama is a very interesting place. There’s been a lot of offshore activity there. And so I think that is a place to be looking for. The problem is that looking at offshore projects, they take it’s a seven to ten year timeline, as opposed to something like Shell, which is six months to 18 months. But yes, there’s definitely opportunity.

TN: So is West African crew substitutional with Russian crude?

TS: No, it is not.

TN: Okay. So is it lighter, that sort of thing?

TS: It’s lighter. It’s lighter crude oil, what we’re looking at right now. And this is exactly why the US went to Venezuela and said, we’ll be willing to lift sanctions with you as long as you only sell us oil.

TN: Right.

TS: And the funny thing is that they have a very good relationship with Russia. The problem with this sort of relationship is that we could inadvertently be buying from Venezuela that is actually Russian oil.

TN: Sure. Exactly. So it’s an interesting point on Venezuela. Albert, what are the politics around that we just pick up the phone. Does Lincoln just have a conversation with Venezuela? We send a deputy sect down there, do a deal. How does that work? And is that palatable?

AM: No, it’s not palatable. It’s an absolute joke. Like Tracy said, the Russians have their tentacles all over Venezuelan oil, that you would be self sanctioning yourself from Russian oil globally, but then buying from Venezuela, which is going to be mixed because everybody in the industry knows that if you want to mix oil, you do it in the Caribbean, especially from sanctioned oil from overseas. So it’s not palatable. It’s a joke. I don’t understand what they’re trying to do. It’s just a Wally world at this point.

TN: I guess the thing that I’m continually astounded by is the diplomatic actions of the US administration from Anchorage through this week with Venezuela. They just seem to be tripping all over themselves. What am I missing? Like they just seem to be eroding credibility by the day. Is that fair to say?

AM: It’s more than fair. They’re throwing spaghetti at the wall and seeing what sticks based only upon their little echo chamber of ideology. And it’s extremely naive ideology when it comes to geopolitics or what they’re doing right now.

You can try to erase Russia and go play and then think that you can go to Iran and cut a deal with Iran, not understanding that Russia is going to sabotage that deal. Right. Like they did just today.

TN: Tight diplomatically. While we’re on this this week, the headline said that the UAE and Saudi declined having talks with Joe Biden this week. Is that true? Is the headline the reality of it? And from the time Biden came into office, he was not friendly to Saudi Arabia. So is this payback from that?

TS: No, I don’t think so. Sorry.

AM: Actually, I think it is that it is payback because you have the Saudis and the UAE that have security concerns with the Houthis and the Iranians. And if you’re sitting there approaching the Iranians playing all nice with them, what do you think MBS is going to do?

TS: I agree with Albert on that respect. I just want to interject that the OPEC + Alliance has mainly tried to stay apolitical. Right. So just because the United States says OPEC produce this much more, Saudi Arabia and UAE, which are both the producers that can produce more than the rest, had come out this week and said no, we’re in this alliance and this is how it is, which is totally understandable.

AM: Yeah, but Tracy, but the problem is OPEC saying that is one thing but not taking his call.

TS: No, I agree with you. I agree with you that we have burned bridges. I’m not disagreeing with you here whatsoever. I’m just taking a different kind of look at this.

TN: Sam, what’s your view on that? I’m not hearing you.

SR: Can you hear me now?

TN: Yes, sir.

SR: I would say the naivety of believing that you’re going to have a JCPOA deal or you’re going to be able to have some sort of comeback in terms of Venezuela. So you add the two of those together and who cares relative to what you need to replace Richmond Oil? I mean, it would be great and fine, whatever, but it’s nowhere near enough simply. Right. But it’s also a political naivety to believe that you’re going to have that type of dialogue and you’re going to have it quickly.

TN: Right.

SR: On the front of Saudi and UAE, I would say it is both an OPEC Plus. We’re not going to blow this up before it blows up on its own from the call it the allies of OPEC. Plus.

It’s also the UAE and Saudi is saying, remember, you want to be friends with us, US.

TN: Yeah.

SR: Don’t pretend you don’t want to be.

TN: Right.

SR: So I would say it’s politics in the best possible way on that front. And on Iran, JCPOA, and Venezuela, it was wishful thinking to think that the Russians were going to say no on both fronts.

TN: Well, and the Chinese. Right. I think there are a number of Venezuela has relationships with both Russia and China.

TS: That’s all I was saying is that OPEC is not going to give up that plus alliance. They’re going to try to stay apolitical. Right. Whatsoever. Do I think that the United States is pushing OPEC to Russia and China? Absolutely. Do you see the huge deal that Saudi Arabia made today? Absolutely. Right.

So they’re looking at investing further into China because they are being pushed away from the United States. So agree on that aspect. But I’m just trying to say that they do try to stay apolitical. If you look at the history of OPEC, Iran and Saudi Arabia have been able to subsist cohesively in the OPEC alliance, regardless of the years of them being enemies and having proxy wars against each other. That’s all I’m saying.

TN: Okay. Let’s move on to the next thing. There are a couple of questions about commodities, Tracy, and let’s just cover these really quickly. We have a question about uranium from @JSchwarz91. Will the US ban or will Russia restrict its uranium and could the US actually start producing uranium on its own? Is that a possibility?

TS: The US won’t restrict uranium. It hasn’t restricted uranium because we actually buy a significant amount of uranium from them. It’s easy to say we can skip 600 barrels per day of oil, but not as easy to do with uranium. We’ve stayed away from that.

Will Russia decide to not sell to us? Again, it’s about money, so probably not unless we really push a button in there. Can we produce that amount of uranium in the United States? Absolutely not.

TN: Interesting. Okay. Let’s also move on to rare Earth. So we have a question from @snyderkr0822. He’s asking about the impact of Russia and Ukraine on the availability of rare earths. Is that a factor or is rare Earth more of a China thing?

TS: That’s more of a China thing. We all have to watch to see if China sides with Russia and see how that market ends up. But really, they’re the largest producer in the world, and that’s who we are largely dependent on for rare earths.

TN: Okay, great. Thanks for that.

Now let’s move on to kind of this war driven inflation narrative that we’ve seen over the past a couple of weeks. We had February inflation come out today, and I feel almost as if we’re being tested as a trial balloon for an inflation narrative that inflation is kind of Russia’s fault.

So, Sam, can you talk us through some of the economics of this? Is inflation a new thing like did it just happened two weeks ago?

SR: No. So the inflation narrative going forward, there’s some validity to Russia being the reasoning behind an increase over a base case. Whatever you want to decide that base case is. But in February, January. December and November, those are not in any way related to Russia generally.

What’s interesting to me is how many people are kind of forgetting that, we kind of had a little bit of a log jam breakup in supply chains beginning to occur. It looks like we were going to get a little bit of respite from that narrative. But now if you looked at what’s going on in the neon market, if you look kind of six to twelve to 18 months down the road, it looks a lot less like we’re going to have that log jam broken up and a lot more like we’re going to have somewhat persistent inflation that there is no way for the Fed to solve. There’s no way for the ECB to solve BOJ, et cetera. You’re just going to have to continue to have this hawkish language to try to tamp down those longer term expectations.

TN: Demand destruction.

SR: Demand destruction. But it’s really hard to destroy demand for semiconductors when they’re in everything from my daughter’s doll to my laptop. It is very difficult to destroy that much demand and create an inflationary environment that is less toxic to the Fed or to the ECB without breaking something.

So if the Fed isn’t willing to break something in the next call it six months. They’re not going to break inflation. And if you print out six months from now, you’re breaking something into a midterm election.

TN: Right.

SR: So I’m so much skeptical on the Fed’s ability to do anything at this point.

TN: Right. That’s a great transition to Albert. So how is inflation playing with voters?

AM: Oh, it’s absolutely nuclear football. Allowing inflation to go this high is just going to be devastating to the Democratic Party and Joe Biden. But I want to go back because I have a couple of contentious things to say. Right.

TN: Please do.

SR: Oh, God! Right.

AM: So everyone is pricing in five, six, seven hikes at the moment. Right. But inflation at the moment has probably taken three of them out of the equation because the money’s gone. It’s erasing money left and right at the moment, from the federal point of view, it’s like, why really get rid of it all? That why really attack it when it’s doing our job for us where we only now have to hike three times. Right.

And on top of that, something even more contentious is everyone knows that once the VIX gets to a certain price, somebody sells it off. Right. Somebody industry. Right. But everybody knows that. And when everyone knows that, the house casino usually moves to a different area. What about oil? What if somebody with a big account has bought oil futures and every time it gets to the 120s or 130s, they just crush it for $1015 and the market rallies again.

So this artificial inflation that obviously we have real inflation just because of wage inflation and supply chain. But there’s a little bit of artificial, artificial aspect to it that I think the Fed has been using. Politically, it’s going to be extremely damaging. But for their point of view is if they can get over it and then get the rate hikes out of the way and then maybe probably start QE later in the summer, They could suck their voters at the beginning of the economy back on track again. I don’t think it’s going to work.

TN: Let’s say a month or so ago there was suspicion that we would be doing QT in say June, July. That’s off the table now because of the money that inflation is taken out of the market, right?

AM: Absolutely.

TN: But we’ll do rate hikes and have QE potentially?

AM: That’s right. That’s my point.

TN: You’re in an insane phase of economic history.

AM: It’s just look around, Tony. What’s not insane at the moment?

TN: Undoing this.

TS: That’s 100% fact.

TN: Undoing this is going to be insane. Okay, speaking of undoing crazy stuff, the Chinese techs and real estate stocks really have some problems this week.

So Albert, Sam, can you guys talk a little bit about that? And we have a tweet showing some stocks from Tencent, Alibaba, JD, other ones down 50, 60, 80%. So what’s happening with the tech blood bath in China?

SR: I’ll just do a quick start. Did you see the numbers coming out of JD? They were horrible. I mean, they were absolutely atrocious. So, yeah, you’re going to get a sell off in tech broadly across the board in China. When your numbers are horrible, then you’re going to have additional pressure put on the potential for delisting in the US and the general call it risk off move in markets. So you’ve got the trifecta of horrible for Chinese tech in a nutshell.

But the JD numbers were absolutely atrocious on a revenue growth line. And there’s no way to save Chinese tech if you’re going to have numbers like that. If you continue to have numbers like that, guess what? Look out, because the bottom is not in.

On the Chinese real estate front, I think Albert has a much better view on this than I do. But I would say if you’re going to have a risk off in tech, good luck having a risk on in real estate.

TN: Sorry. Let me stop you before I move on to real estate. So the tech story, what I’m pulling away from there is that it’s potentially disposable income story at the retail level, at the consumer level, and tells me that China is way overdue with its stimulus. Is that fair to say?

SR: That’s harder to say.

TN: Okay.

SR: I would be very careful in saying that the Chinese consumer is not there. China is coming with stimulus. If you’re trying to hit 5.5 by the end of this year and you’re going into a plum, guess what? You got to hit the pedal.

TN: Well, they better hurry up.

SR: They’ve got time, but they’re going to hit the pedal. And the question is how do they hit the pedal? And it’s got to be the consumer because they’re not going to hit it on real estate.

TN: No, they’re not. Going through some of the real estate.

AM: Yeah, well, I have a couple of points to make on. I have a couple of points about the tech. China tech. What was interesting is Sam is right. JD numbers were horrible. Right. This SEC Delisting thing pointed out five companies. Right. Just five. And the big ones. Gamble is a big one. And whatnot. But why only five? It happened to be the only five that actually did their accounting and submitted their accounting numbers. Right. And would that actually let a snowball effect out to say, Holy crap, they will take down every single Chinese number, Chinese company in the market. That’s why a lot of this actually sold off harder than you think it would sell off.

Going to the real estate market. I mean, 75% of China’s fault is real estate. So unless Xi wants pitchforks and torches coming after him, he’s going to have to stimulate the economy, something to support the real estate market.

TN: Yeah. It seems like it’s going to have to come hard and fast. I could be wrong. But, you know, with.

AM: I think by June. I think by June he’s got to do something. He has to.

SR: Hit through the middle.

AM: Absolutely.

TN: Good. And do you guys have any ideas on what exact forms that’s going to take? I mean, of course they’re new triple R, of course, taking a new infrastructure spending. They do the stuff. They announce it every other year. Are there other forms that you have in mind that will take that?

AM: I don’t, to be honest with you, that is $64 million question. To be honest. That’s a big question. That’s very complex.

SR: Yeah. And if I had the answer to that question, I probably wouldn’t be on this call.

TN: Come on, Sam. We know you would.

SR: I would be on a yacht somewhere.

TN: Yeah, that’s right.

TS: It’s interesting about that. If you look at the energy perspective, they just had a meeting and they totally decided that they’re going back to coal other than anything else. So that to me that signifies we have stress in other markets. Right. We cannot spend the money in other places. So we’re going to go back to what we do best, what we know best. And they also offered, if you look at internal documents that are offering huge discounts for going back into the coal industry or whatever. I just like to.

TN: So there’s still 73% coal for their power generation, something like that?

TS: Yes. So for them, they backtracked on COP. They need the money right now, in other words.

TN: Right. So the whole Paris agreement is a convenient agreement, is that what you’re saying?

TS: Correct.

TN: Okay, very good. It’s good to know that we’re all committed to the future. Okay. So guys, speaking of the future, finally, what do you view for the week ahead? Albert, let’s start with you. Maybe with China. Do you think there’s more to come with the blood bath in China?

AM: I think there’s another week or two to come with China blood bath. And I think that’s going to obviously lean on our equities going into Fed week.

TN: Right.

AM: So yeah, I think we’ll be another down week.

TN: Okay. And guys, what about US equities? Are we on a steady decline down to some number 4300 whatever it is, or are we kind of about there? What do you feel is going to happen over the next week?

AM: I think we’ll be sub 4000 by the end of the week at some point.

TN: Okay.

SR: Yeah. I wouldn’t be anything other than market neutral until immediately following the Fed meeting and then you just rip it to the upside.

TN: Okay.

AM: Yeah. The only thing that I have a concern about is we still have this Ukraine war going on which is giving outrageous headlines and then if the Fed hikes 25 basis points and then extremely hawkish tones while Putin is shelling Kiev.

TN: Right.

AM: It’s hard to rip until after that’s all settled.

TN: So sorry, Sam, in your scenario, are you saying the first half up until say Wednesday we have a pretty quiet market, then Thursday and Friday, things are pretty active to the?

SR: Oh no, I am not saying that you have a quiet market until the Fed. I’m saying you don’t want to take a position period until the Fed and then you either want to grip it or rip it one or the other.

AM: I agree with that one wholeheartedly.

TS: These markets will continue to be volatile until we have some resolution with this Ukraine Russia situation just because of all every day we’re seeing new sanctions against Russia and against commodities within Russia, at least for the commodity sector. I think we’ll continue to see volatility, but over the long term I’m still very bullish commodity.

TN: Okay. So Tracy, Sunday night, futures open, crude traded very high. Do you think there’s a possibility of us seeing another dramatic spike like that in the next week or two?

TS: I think that mostly been priced out of the market. I think that was priced in right. We saw a lot of that risk premium come out of the market, which I was very glad to see. I would personally be happy if we saw it traded in the 90s again before going into high demand season because I do think that we will trade higher on fundamentals. But it scares me when we have these big kick ups due to headlines and geopolitical risk.

So for me right now I would like to see this market come down a little bit. I’d like to see it pull back some and hopefully things will resolve quicker than sooner with this situation. But still going forward, I’m still very bullish this market.

TN: Okay. We didn’t talk at all about nickel and metal’s markets, but we saw the LME close today because of a nickel trade supposedly. Will we see those markets reopen and will we see nickel trade? Is it scheduled to trade again on Monday and is there the potential for commodity specific disruption and markets closing over the next week or two because of the volatility.

TS: There’s been a very high contention discussion right now, especially within the commodities industry. I would just say that it was kind of unprecedented what we saw there and the fact that they canceled all the trades. I would say that hedge funds are kind of backing away from that market right now because they’re skeptical of that market right now. But again, it’s not like I don’t want to say this is going to be the norm or anything like that.

TN: Okay.

TS: I think this was a one off crazy thing. It happened in the aluminum market years ago and you can even look it up on Wikipedia, right.

TN: Okay. Last thing week ahead with bonds. Sam, what are you thinking about bonds? We’ve seen the ten year go back up to about two. Are we going to see that continue to take up?

SR: I don’t know. I think the ten year is a little less interesting than the five year and the seven year.

TN: Okay.

SR: The five year and the seven year are really what you want to watch because if the fed goes 25 and goes really hawkish, it’s the five and the seven that you’re going to get the juice from and the ten and the 30 you’re going to get a little less so watch the five and seven. I think the five and seven are really interesting here. If you want to take a bet on a really hawkish Fed.

TN: Fantastic. Okay, guys. Thanks very much. Really appreciated. Have a great week ahead. Thank you very much.

AM: Okay. Bye.

SR: Thank you. Bye.

Tags Alibaba, boj, Canada, ci futures, ESPO, Fed, JCPOA, LME, MBS, opec, qt, Russia, Russian, saudi arabia, Tencent, UAE, United States, US, Venezuela, week ahead

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